Swap
What Is Swap?
Swap is an interest that is applied each day to orders that maintain a position open overnight, this is until the order is closed. Swaps represent the interest paid until the trade is concluded. The interest rate in swaps can assume standard, triple, or none at all, depending on the day and trading instrument in question.
Swap rate
Swap rates vary considerably, as each trading instrument determines these rates differently. For example, all stocks and most cryptocurrency instruments are swap-free. Triple swap is applied on Wednesdays for most FX and metal instruments, and on Fridays for energy (commodities) and some cryptocurrency instruments.
The factors affecting the swap for a particular instrument include:
- Central bank interest rates
- Order type (short for sale or long for purchase)
- Get started with a minimum deposit as low as USD 200, – making trading accessible to all.
Triple swap
Triple swap comes into play when the settlement date of the instrument extends beyond the closure of the order. However, for Energies, the concept of triple swap doesn’t apply. Instead, a singular overnight charge is levied for each day of the week.
Swap= Swap long/ short x number of days x pip value
Pip value= number of lots x contract size x pip size
If the total is negative, then that number would be deducted from your trading account balance. If it is positive, no swap charge would be applied and the amount will be credited to the trading account.
Swaps Serve Several Purposes In Trading
Risk Management
Traders use swaps to manage interest rate risks associated with holding positions overnight. By engaging in a swap, they can offset potential losses or gains resulting from interest rate movements.
Hedging
Swaps can be employed to hedge against potential adverse movements in exchange rates. For instance, a trader holding a long-term position in a foreign currency might use a swap to lock in the exchange rate and mitigate the impact of currency fluctuations.
Speculation
Some traders use swaps for speculative purposes, aiming to profit from anticipated changes in interest rates or currency values.
Costs and Returns Optimization
Understanding and strategically using swaps can help traders minimize rollover costs and maximize returns, especially when engaging in positions held overnight.