The word Forex Swap will come up as you learn more about Forex on a daily basis. The “Forex swap” is maybe one of the most confusing words in Forex trading. When trading, it’s crucial to know how the Forex swap works because it can positively or negatively impact your potential profits.
What is Forex Swap?
An interest fee that you are charged or paid after each trading day in forex is called Forex Swap. When you trade on margin, you earn interest on your long holdings and spend it on your short positions. The carry is the differential in net interest rates, and carry traders aim to profit from it.
When you get more interest than you are required to pay, it is credited immediately to your account as positive carry. If it is found to be negative the carry is deducted from your account. The deal has no interest implications if it is opened and closed on the same day.
How to Calculate Swap?
The contract size, current price, interest rate difference, and markup that make up the swap rate are all you need to calculate it
As a result, the formula is simple:
Swap = (One Point / Exchange Rate) * Trade Size (Lot Size) * Swap Value in Points
Can I Make Money From Swap In Forex Trading?
The first stage in executing a carry trade is to identify a high-yielding and low-yielding forex currency pair. The Japanese Yen (JPY), Swiss Franc (CHF), and Euro are examples of low-yielding (or financing) currencies (EUR). The Australian Dollar (AUD) and New Zealand Dollar (NZD) are popular high-yielding currencies, while advanced carry traders may choose the South African Rand (ZAR) or other exotic currencies.
Let’s look at the Euro and the Dollar: interest rates in the Eurozone are currently below 0, while interest rates in the United States are currently at 2%. This indicates that buying AUD with EUR, i.e. going short EURAUD, is a way to earn carry. Isn’t it great how easy it is?
Unfortunately, it isn’t that simple: it’s pointless to earn a pip a day in swap if the pair is moving against you by 100 pips per week. In other terms, if we make a carry trade on EURAUD, we’d wait until the pair was going down, sell into any strength, and hold for the course of the downtrend.
Swap in forex can enhance your trading performance significantly so it is important to have knowledge on the facts of how it operates and works. Think of it as a bonus or incentive for holding a trade long term.