Whenever it comes to forex trading or financial markets, a sound understanding of the ways how things work is one of the most important aspects to identify how well you are going to perform here in your trading career. With this in mind, we will help you to understand what are forex swaps and how you can calculate swaps here more effectively.
If you want to perform well in forex trading and planning, it is vital to accumulate knowledge of trading fundamentals here that will likely come across during trading here. Forex swaps are one of the most important fundamentals here. Because FX swaps are going to impact your account balance and how much profit you will make here.
So, here we go:
Swaps are known to be an interest fee that is either paid to you or charged to you at the end of a trading day. When you are trading on margin, you can receive interest for holding your long positions. However, you have to pay charge for short positions as well.
The net interest rate is known as carry and traders who want to make profit from this are called carry traders. Forex trading is generally all about selling or buying a currency for another currency with a perception to swap the currency back with the broker later.
If you are not going to swap back the currency by the end of trading hours, then you will pay the broker to hold your position and perform a swap later.
For forex trading you can calculate forex swaps on the basis of interest rate differentials between the currencies that are traded. It is basically the rate at which you will exchange interest in one currency with the interest of the other currency.
While calculating the swap points besides forward date, the days from the spot are also being considered. Even more, it also adds prevailing interbank deposit rates for the currency pair involved.
While based on the traded currency pair, and the present interest rate prevailing the forex swaps can be either positive or negative. For a person selling a currency with a higher interest rate forward, the FX swaps rate will be positive. However, if the person is buying currency with a higher interest rate, the swaps rate will be negative.
Overall, swaps can be useful for short-term deposits or borrowing’s transformation from one currency to the other. You can also consider to use Fx swaps for re-exchange currency or utilize your cash surpluses to boost the income of your short-term investment.
However, a company can also consider to use forex swaps for hedging as well.
Overall, you can also think of forex swaps as an added bonus or incentive to hold a trade for a longer period of time. This can help you to make some more profit as well.