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What Is Forex Swap in Simple Words? Will One Gain or Lose with It?

What Is Forex Swap in Simple Words? Will One Gain or Lose with It?
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Greetings, friends. It’s John Foster. There is much difficult to understand for a novice at forex, which makes them fear the mysterious exchange, considering it’s very hard to make money there. I’ve decided to solve this problem, and at this time, I am to describe another important tool forex is based on – the so-called forex swap. What is it in simple words and how to use it? Read further and you’ll get known.

Contents

1.The Essence of Forex Trading!
2.What Is Forex Swap in Simple Words? The Term Itself!
3.When Is Forex Swap Counted and Who Needs It?
4.Swap-Free Accounts! Best for Long-Term Traders!
5.Do People Trust Swaps?
6.2 Important Truths About Forex Swaps!
7.Finishing!

The Essence of Forex Trading!

For your better understanding about what forex swap is, I need to describe the main essence of forex market, how its mechanism works and what a trader actually does when opens a new order. So, let’s bring it on.

We buy the currency pair EUR/JPY (euro/Japanese yen). Traders usually say: I buy a quote, and there is the question: can we actually buy a quote? A quote is the ratio between prices of two currencies. So how can we buy this ratio? In fact, when we buy EUR/JPY, we make two orders. Firstly, we buy euro, and secondly, we sell Japanese yen. Thus, we place a bet that the latter will fall and the former will rise.

Most can be wondered: how can we sell the currency we don’t really have? The account is opened in dollars or rubles, but not in yens, so how can we sell it? Another question: who sells us euro? A broker? Other traders? Banks? Too many questions. It’s time to answer them.

Actually, the answer for all that stuff consists of 4 letters – swap. It is forex swap that lets us sell what we don’t have and sell another currency from the indispensable source. How does it happen really? When we push the button “Open An Order”, the following is made:

  1. We take the loan from the Central Bank of the country whose country we sell. In this case, it is Japan. We must pay interest set by the Central Bank.
  2. We change the acquired currency in the Central Bank of the country whose currency we are to buy. In this case, it’s European Central Bank. With that, those euros are not retrieved by us, but remain in that bank, and there is interest for the deposit of it.

What do we have in total? Japanese Bank requires loan payments taken from it, and European Bank gives us that interest. So, the difference between interest rates of European Central Bank and Japanese Central Bank is our actual forex swap. It can be either positive or negative.

If the interest rate of European Central Bank is 2%, while that of Japanese Bank is 1%, so our swap will be 1%, and it will let us make some money via the opened position to buy EUR/JPY. And in case when Japanese Bank’s rate is 3%, our swap turns negative, as loan payments exceed interest of the deposit.

forex-swap-1

This is the main principle of forex trading. We could buy currency without forex swap, but we couldn’t sell it. You can do forecasts for any quote and in any direction with forex swap, even if neither currency of the quote is the currency of your account.

What Is Forex Swap in Simple Words? The Term Itself!

So, it’s time to define the term. What is forex swap in simple words? Forex swap is the difference between the interest rate of the Central Bank issuing the currency you buy and the rate of the Bank which issues the currency you sell. The swap can be either positive or negative, and sometimes can even not exist, if rates of both banks are equal.

Shall we fear swaps or pay attention to them? No, we should not, if we hold our position less than 3 months. In such case, forex swap’s value won’t be noticeable for you, as fluctuations of the currency pair are by far more considerable and cover all the profit or loss you have with the swap.

When Is Forex Swap Counted and Who Needs It?

Swap is counted when you move the position to the next day. So, those traders who trade within a one day (so-called scalpers), don’t care about forex swap, no matter positive or negative it is. Swap is counted at 12 AM GMT.

Only those trade should pay attention to swap, who hold the position more than a week. In such case, with the strong difference between interest rates of two banks, you can suffer great losses or gain much. However, it occurs quite rarely, as rates of world leading powers, whose currencies we work with, are very low and can’t lead either to considerable profits or to considerable losses.

Swap-Free Accounts! Best for Long-Term Traders!

If you trade with the one position for more than 3 months, then you are recommended to open swap-free accounts. With that, you will be charged with higher spread, but it doesn’t matter for you, as you hold the position long enough and the spread is unable to affect the profit. You must specify your desire to open a swap-free account when registering, as for default, a standard one will be opened. Such service is provided by all the leading brokers.

Do People Trust Swaps?

When the system has been just implemented, traders were suspicious about it, but nowadays, popularity of forex speaks for itself. There is no difference about how it’s possible to trade this way, as the main point is it’s profitable (with the correct approach, for sure). Study all the basics, the trading strategy, choose the reliable broker, and you will succeed in this, and swaps won’t hinder.

2 Important Truths About Forex Swaps!

Swaps can’t lead to losing money, no matter how long you hold the position. The reason for that is the great leverage offered by the broker and also considerable fluctuations of currency rates. Don’t fear that forex swap will eat all the profit in case of a right market forecast and entrance. Firstly, it can help you make money, and secondly, its size is too small for considerable impact on the deposit.

Finishing!

So what is forex swap in simple words? It is the difference between two interest rate which can be either positive or negative. This spread is counted on all the opened positions at 12 AM GMT. But don’t think forex swap will have high impact on your profit. If you trade with popular currency quotes such as euro-dollar or pound-dollar, then forex swap will not be noticeable because of fluctuations of the chart. But if you trade with exotic currencies of Third-World-countries, or hold the position for more than 3 months, then you are recommended to open swap-free accounts.

Get lucky and gain much!

Best Regards, John Foster.

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Technical Summary

Timeframe 2018-01-22 13:56:37 GMT
EUR/USD
1.2249 +0.0026 (+0.21%)
Summary Neutral
Moving Averages: Buy (5) Sell (7)
Indicators: Buy (4) Sell (3)
EUR/USD 1.2249 Neutral
EUR/RUB 69.2984 Strong Buy
USD/RUB 56.5860 Sell
GBP/USD 1.3922 Strong Buy
USD/JPY 110.77 Strong Sell
EUR/JPY 135.68 Strong Sell
AUD/USD 0.8017 Strong Buy
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