Many people, even those who already invest in the currency market, who do not know what the swap in forex is. Also known as swap points, swap commissions or rollover in forex. Although it is true that it does not affect scalping or intraday operations, it is a charge to be recorded when a position remains open from one day to the next. A charge that can be both in your favor (they pay you) and against you (you pay it).
Accounting for all expenses and income is essential for a healthy economy. So let's see what the swap is, how it affects you, how you can benefit or harm yourself, and most importantly, how the swap is calculated in the forex.
What is the swap?
Some people call it currency rollover. The swap is the difference between the interest rates of two countries. It would be correct to say then, that it is the difference between the interest rates of the countries. However, since "currency pairs" are touched in forex, it is best to say that the difference is between two countries. The two countries involved in a specific currency pair.
This annual interest, It must be paid for each operation that we keep open from one day to the next and every day. And it exists because the interest rates to finance a country are not the same among them. We have areas with very low and even negative rates, such as the Euro area (EUR currency), Switzerland (CHF currency) or Japan (JPY currency), and other higher ones, such as Russia (RUB currency). . There are isolated cases of countries with huge interest rates, such as Argentina. On DataMacro, a website that I recommend and that I have often used to look at data from other countries, you will be able to find out the interest rates that exist at all times.
Where does the swap come from in forex?
From the almost complete difference in the interest rate of the Central Bank to which each currency corresponds. To understand it, let's take the Australian Dollar (AUD) and the Swiss Franc (CHF) as an example. Among others, because the AUD / CHF pair is the one that I am working on the most. For almost 2 years I have constantly open purchase operations. This example is roughly:
- Recall that the first currency of the currency cross is the base currency, in this case AUD. The second is the quote currency, in this case CHF.
- AUD is subject to an interest rate of 1%, and CHF has a rate of -50%. Its total differential is 1’50-(-1’25)=2’75%. This would be an interest in our favor, if our position is bought. If, on the other hand, we sell, we will have to pay this interest.
- If, on the other hand, we took the cross the other way around (CHF / AUD) we would have a difference of (-1'25) -1'50 = -2'75%. Therefore, in a long position we would pay that swap, and in the event of a sale we would receive it.
- Remember that from the first coin if you buy it you receive your interest, and from the second when you part with it you pay it. On the contrary, if you sell, on the first coin you pay the interest, and on the second you receive it.
- Interest rates tend to vary over time. Some are very stable, others are very unstable (alert with these, we do not want scares).
So far, you can see the logic behind the swap. If you take the interest rates of the currencies involved in each cross as a reference, you will see how your broker pays or charges you depending on which ones you have looked at.
The swap / rollover in the broker
This is important. The broker does not express a percentage, but rather in pips (in your favor or against). And furthermore, you will see that it is not proportional, a long position is not the same as a short position. Shouldn't it be the same? Yes, indeed it is. What happens in this case is that the broker charges a commission on each one and on its liquidity providers. And it is to be understood, because it is your business and we benefit from your services.
In my case, my broker pays me for a long position (Swap Long) in AUD / CHF, 0 pips per day. Then, if I open a short position (Swap Short) I would pay -44 pips per day. If no commission is charged, we would perhaps see more exact pip figures, such as 0 and -71'0,55 for example, depending on whether it was a buy or a sale.
How can you benefit from the swap
Be careful, because this is a double-edged sword. I explain. The first time I had a notion of the swap, my first impulse was to look for the currency that paid the most pips to maintain an open position. «I will leave my position open ... Every day I will scratch more pips ... And I will be the master of the universe». Don't even think about it!
You can find out for yourself how the quotes of those currency crosses with high swaps in the long run. If you look for them, which I encourage you to do, you will see some graphics that scare you. Does that mean that we should forget about swap? No no, far from it! But It's a double-edged sword, and I must warn you. The interests do not vary because they do, but that is another story.
A swap can benefit you, or help you, without being a guarantee of total success, in making decisions for long-term forex trading.
How is the swap calculated in forex?
Let's imagine that we want to trade a buy with the EUR / USD, and to keep the numbers simple, let's imagine that we buy a mini-lot, which is equivalent to 10.000 USD.
- Each pip, or what is the same, each 0'0001 of the EUR / USD quote, is equivalent to $ 1.
- Interest rates in the USA are higher than in the Euro zone.
- In the United States, for example, they are 2% and in the Euro Zone 25% (As an example, I am not saying that now these are).
- When buying EUR we will receive 0%, and as we part with USD we will pay 2%. Which implies that we will pay a 25% per year of $ 2. Equivalent to $ 25.
- $ 225 per year, that is $ 0 per day, which in pips would translate into -62 pips. Negative because in this case, it is what we should pay. And adding that the broker is going to add the commissions, a higher value may come out, of 0 or 62 pips.
- For the pips / points of the swap to go in our favor, we would have to make a sale instead of a buy, in this case.
In case you use another currency pair, the pips will always be paid for the quoted currency. Then you just have to do the conversion to your currency, to know the exact amount you will receive.
Final conclusions
We have seen that the swap in forex, they have no mystery, beyond the pertinent calculation to know how it affects us. What It can benefit us as well as harm, depending on our decisions. And that is something to keep in mind, especially in long-term forex operations. It is also a valid calculation for metals such as gold and silver.
There are also brokers that use swap points as a rollover for some commodities, operating in CFDs. As long as we go long term, we must pay attention to those daily expenses that we are going to generate for keeping an open trade.