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How Swaps Work

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How Swaps Work

In theory, positive and negative swaps should be equal. But this is not the case. When buying a currency, for example euros for US dollars, the trader performs the following operations:

  • takes a loan in dollars (if the currency of the trading account differs from the currency for which the goods are purchased, then the currencies are additionally converted) for the volume of the transaction and under the terms of leverage;
  • deposits "goods", that is, euros;
  • receives% for the placed deposit;
  • pays interest on the loan.

When closing a transaction, the exchange rate difference at the time of closing is taken into account, the commission for the transaction and the difference in the amount of funds received when placing a deposit and paying interest for a loan are written off.

In fact, everything is even more complicated. Each broker has a bank that provides him with credit funds for transactions. The percentage for the use of funds differs from the calculated one, as if the funds were provided by the central bank of those countries in whose currency the transactions are performed. Therefore, to understand it, it is worth familiarizing yourself with the table of valid swaps of a particular broker.

A minus value means a negative swap, that is, funds will be debited from your account, a positive value means that funds will be credited to your account.

Swaps? When should you pay attention to them?

A novice trader is often afraid of the very presence of an additional fee for the transfer of open positions to the next day. This is one of the factors that make a beginner trade exclusively within the day.

In part, this fear is shaped by fear. After all, the profit still needs to be received, and the commission for opening a deal has already been paid. Why pay also for the transfer of an open position. However, with experience comes the understanding that traders who trade outside of one trading day, on average, make more profit than those who exclusively trade intraday.

In addition, you can earn money on positive swaps. This does not mean that there is no need to conduct technical and fundamental analysis before a trade. Ultimately, the main trader's profit is formed precisely because of the exchange rate difference. And it can be many times higher than the income or loss from the swap. Depending on the popularity of a particular instrument, the commission for opening a deal may initially be higher than the size of a positive swap. Therefore, an attempt to make money by holding a position for one day can be a failure.

It makes sense to pay attention to swaps in case of long-term holding of an open position for one month or more. Then they can be comparable in terms of profit with the goals that can be set in a particular deal. But this is only if there are positive swaps for this instrument and the selected open position.

Attention should be paid to the size of the swap, as well as the commission, when trading "exotic" and unpopular currency pairs, for example, the Mexican peso or the Turkish lira. Relatively high fees and swaps are generated when trading currency pairs that do not include the US dollar, that is, "crosses".

In the case of trading popular major currency pairs, one of which is the US dollar, you should not pay special attention to the size of swaps. The potential profit on these transactions will be an order of magnitude higher than the size of the swap.

If you are more attracted to scalping or intraday trading, the size of the swap ceases to play any role at all.