Positive swap forex

Usage of Swap Strategy on Retail Forex Market.

Traders commonly interpret payment for retaining an open position overnight (aka Swap) as an additional fee, which they must pay to their broker, since Swap is negative for most of currency pairs. In other words, it is a debit to customers’ account. However, for some currency pairs it is positive. Therefore, sometimes traders try to make a profit on FOREX market at the end of trading session on Wednesday, when a triple Swap is charged.

In order to realize what events take place on FOREX market right before Swap is charged, let’s define what is Swap. Swap is an arrangement of two opposite side contracts, one of which closes previously opened trade and the other reopens an identical trade, but at a different price level, so that it takes into account the payment for retaining that position. Hereby, banks and other liquidity providers carry out daily settlement procedure.

Traders, who try to make money using a Triple Swap strategy , usually act in the following way: they buy Australian Dollar against US Dollar (since interest rate on AUD is higher) 20-30 seconds prior to Swap being charged, that means, they go Long AUDUSD without giving any consideration to the direction of the trend. In 10-15 seconds after SWAP is charged, traders liquidate that order. It is important to understand, that between the initiation of the transaction and its liquidation, i. e. for 40-50 seconds, a full cycle of settlement is carried out (as described above).

If at a specified time price has soared or remained practically unchanged, the client by closing the transaction receives either positive or zero gain along with a positive swap. In case of adverse price movement the financial result of the transaction will obviously be negative. However, the client will presumably receive income in the form of difference between positive swap and a loss on the transaction plus the broker’s fee.

Unlike Triple Swap trading – which is conducted in very short time frame, Carry Trade is an investment strategy. Carry Trade is also based on an idea of borrowing a low interest rate currency and investing the proceeds into a high interest rate currency. The gain comes in a form of difference between those interest rate yields. By choosing this method of investing, trader accepts the risk of adverse prices movement on a financial instrument.

Currently, the interest rate for Australian Dollar is higher than the rate for U. S. dollar. Therefore, volume of long positions on AUDUSD pair considerably exceeds volume of short positions. At the closing of each trading session long positions on AUDUSD are liquidated, resulting in a large amount of sales in Australian dollar. That consequently leads to decrease in the level of BID quotes which widens the spread, while the level of ASK quotes remains practically unchanged. Then, at the time of reopening of those positions, when Australian dollar is repurchased, BID price rises and restores the spread to its previous levels.

On ECN BID and ASK prices are formed by the so-called “Depth of Market” also known as Level 2. This technology combines information received from Liquidity Providers with broker’s own book of limit orders, so that available volumes at various price levels form liquidity pool.

Depth of Market at any given time looks as follows:

Buy and Sell orders of particular currency pair are grouped according to the price, while charts only display the best Bid and Ask prices.

In order to conduct the procedure of session closing – settlement, it is necessary to close all open positions and then reopen them at the price, which will take into account Swap. Recall, that one closes deals with opposite side deals, that means, that for closing Buy order bank should sell previously opened contracts. It can be done either by matching against a Market order (Market Order Sell) placed by other broker’s clients, or by matching with Pending orders (Buy limit) placed by Liquidity Providers and clients.

Hereby, when an aggregate volume of long positions significantly exceeds the volume of short positions, at the time of settlement Depth of Market looks like this:

A large volume of Buy Limit orders from Liquidity Providers (Bid prices for broker’s clients) is consolidating at the price level, which is different from current (the volume of 120 lots at the price of 0.9700). Buy Limit orders placed by broker’s customers represent a small part of total liquidity (orders at the price from 0.9745 to 0.9741).

As previously mentioned, at each point of time the best Ask and Bid prices are displayed on the charts. At these prices orders are executed every given moment of time. However, one should not overlook the fact, that those volumes which are available for buying or selling of a currency at these prices might be miniscule. And if there is a large volume order, the price of bargain conclusion will be wide different. At the moment the best Ask price is 0.9746, the best Bid price is 0.9745. If during short period of time customers or liquidity providers don’t place any orders, the order Sell Limit with volume 1.5 Lots at the price 0.9746 (Ask price) will be matched with Buy Limit orders with total volume 1.1 lots (0,2+0,4+0,1+0,1+0,3) at the prices from 0.9745 to 0.9741 (Bid prices). The next available price will be 0.9700. Hereby, due to considerable difference between prices, there will be a spike on the chart.

Over the next a few seconds all the positions on AUDUSD will be reopened at prices that take into account Swap and Bid quotes will stabilize.

However, if the client has a low Margin Level, it is possible, that orders will be automatically closed according to Stop Out procedure. If price Gap occurs, all the orders will be closed at the next available price after Gap. As a result, client’s balance might become negative, than it will be adjusted up to zero.

A trader opened the order Buy AUDUSD with volume 31.10 Lots at 23:59 server time. In a few seconds after Swap is charged he closed the order. In spite of the fact, that the order was closed with the loss of -528.70 USD and trader paid the commission of -154.18 USD to the broker, credited Swap covered losses and resulted in a net gain of + 110.17 USD.

At the same time, in case of low liquidity in the market and low Margin level (when the volume of opened order was too large), trader might make not a profit, but loss, and lose a significant part or all of the deposit.

A trader opened order Buy with the volume of 25.40 Lots, the balance of his account was 5026 USD, Used Margin was 4951 USD. After abrupt movement the order was closed according to Stop Out procedure. The client made loss -11734.80 USD and paid broker’s commission -123.78 USD. There was no enough money on balance to cover the loss; therefore, the balance was adjusted at the broker’s expense.

Thereby, Carry Trade investing brings a guaranteed income only if the exchange rate of the currency pair remains unchanged. Applying Carry Trade, as well as any other strategy on Forex market, involves various risks, therefore, its use must be based on thorough market analysis.

Written by Katsiaryna Krauchanka , FXOpen financial analyst.

Katsiaryna Krauchanka.

FXOpen Financial Analyst.

FXOpen Forex Broker.

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Understanding Foreign Exchange Rollover.

by Antonio Sousa.

Foreign exchange rollover, what is it?

Rollover is the interest paid or earned for holding a currency spot position overnight. Each currency has an overnight interbank interest rate associated with it, and because forex is traded in pairs, every trade involves not only 2 different currencies but also two different interest rates. However, unlike what many traders think, foreign exchange rolls are not based on central bank rates. Instead, forex rolls are constructed using forward points which are mostly based on overnight interest rates at which banks borrow unsecured funds from other banks. After all, the foreign exchange market works over-the-counter. Market and spot trades need to be settled and rolled forward every day. If the interest rate on the currency you bought is higher than the interest rate of the currency you sold, you will earn a positive roll. If the interest rate on the currency you bought is lower than the interest rate on the currency you sold, then you will pay rollover.

Currently, most forex rolls are low and some are even negative, why?

In the last two years, central banks around the world took a number of measures to increase liquidity and stabilize financial markets. Among the actions taken by central bankers was a significant reduction in overnight lending rates and major injections of capital into the banking system. Eventually, after restoring some confidence on the financial system, central bankers succeeded in bringing down interbank rates. In other words, it became cheaper for banks to lend money between themselves. However, it also meant that the interest paid or earned for holding a currency position overnight would be significantly lower. In this situation, it may happen that both rolls for buying and selling currencies are negative because banks and other foreign exchange market players charge a small spread on interest paid or earned.

How do carry trades work?

Traders looking to “earn carry” will buy a high-yielding currency while simultaneously selling a low-yielding currency. So, assuming the exchange rate remains constant, an investor is able to earn the difference in interest between the two currencies. The foreign exchange carry trade has a successful track record that goes back more than 25 years. However, the recent shift in the world’s financial markets towards lower interest rates and higher risk aversion makes it more difficult to make successful carry trades.

When is rollover booked?

5 pm in New York is considered the beginning and end of the forex trading day. Any positions that are open at 5 pm sharp are considered to be held overnight, and are subject to rollover. A position opened at 5:01 pm is not subject to rollover until the next day, while a position opened at 4:59 pm is subject to rollover at 5 pm. A credit or debit for each position open at 5 pm generally appears on your account within an hour, and is applied directly to your accounts balance.

How do banks account for Weekends and Holidays?

Most banks across the globe are closed on Saturdays and Sundays, so there is no rollover on these days, but most banks still apply interest for those two days. To account for that, the forex market books 3 days of rollover on Wednesdays, which makes a typical Wednesday rollover three times the amount on Tuesday. There is no rollover on holidays, but an extra days worth of rollover usually occurs 2 business days before the holiday. Typically, holiday rollover happens if either of the currencies in the pair has a major holiday. So, for Independence Day in the USA, which is on July 4, when American banks are closed and an extra day of rollover is added at 5 pm on July 1 for all US dollar pairs.

You can view how rollover is counted for holidays using our Rollover Calendar Page .

Why should you invest in currencies, even with low interest rates?

Even though, making carry trades has been less appealing over the last few months, the currency market is still one of the best places to invest. After all, the forex market is still the most liquid financial market in the world with an average daily volume of over US$3 trillion, according to the Bank for International Settlements. This is more than three times the total daily volume of the stocks and futures markets combined. Moreover, with a no-dealing-desk forex broker, every trade is executed back-to-back with one the world's premier banks which compete to provide your broker with the best bid and ask prices. This competition between banks can reduce the potential for market manipulation by price providers.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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Past performance is no indication of future results.

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The Forex Swaps and Why You Should Not be Afraid of it.

Hello, dear readers! Very often, beginners in the Forex market do not trade on the daily charts because of the swaps. They are frightened by the realization that for holding a position longer than a day they will pay a charge. But swaps may be positive. So what is a swap? Is it excessive loss or the opportunity for additional income? Is it possible not to pay the swap? The answers to these questions and more are below.

What is swap in Forex.

So, what is swap? This is the difference in interest rates on loans between two currencies that is deposited or charged to the account when you rollover a trading position for the next day. Moreover the swap can be both positive and negative.

Why do we pay for the rollover of the position for the next day?

First, we do not want to receive physical delivery of the currency. Let’s say we bought EUR/USD. Our task is not to get Euros and sell dollars. We are only interested in some sort of speculation with currency pair. We wonder would the price go up or down depending on our position. We do not want to receive physical delivery of n-th number of currency. Since we’re just speculating, but we don’t need real money, our position, our order is transferred for the next day without delivery of real currency. And swap is charged while this transfer .

Let’s look at the example. Let’s say we buy EUR/USD. In fact we buy euros and sell US dollars. If the interest rate on Euro is 2%, and the dollar is 1%, then when you rollover (transfer the positions to the next day), you will get positive swap about 1%.

And if we sell EUR/USD, then we buy dollars and sell Euros. If the interest rate on Euro is 2%, and the interest rate on dollar is 1%, then swap will be negative and will be approximately 1%

Why is this interest charged?

When we sell dollar, as we don’t have it initially, we take it on loan. And accordingly we pay interest rate of 1% for a credit if we keep our position in the transfer to the next day. If we sell what we have not, we pay interest for the use of borrowed funds.

Why do we get a certain percentage depending on interest rates? Why should we get extra payment when we buy any currency?

The thing is, when we buy for Euro, for example, we agree that our position can be used to provide credit for selling Euro for other traders. Thus, when we buy something, we get the interest rate. And when we sell something, we pay interest for the loan. Since we were allowed to sell what we had not. And this very difference in interest rates is called Swap. Now I hope you understand why it is.

Where can you find Swap in the terminal?

In the terminal swap is reflected when you open a position. And if you hold it at the time of the rollover to the next day, that is usually more than one day, you can see swap where the profit, or loss on open positions, the price of opening or closing is shown. There you will find Swap column. It can be both positive and negative. And depending on how many times swap was accrued or written off, the profit will also be modified in the light of the swap.

Note that a triple swap is charged or credited in the night from Wednesday to Thursday. Because the banks are closed on weekends, and we still have to pay or receive rate on loan. For this reason, a triple swap is charged. This is to remember and pay attention.

As I mentioned, the swaps are accrued at 17:00 New York time (USA). Or at 0:00 according the time of the trading terminal. It is 1:00 AM Moscow time.

Where can I find information about Swaps?

Swap data are given on the websites of your brokers. For example, Roboforex gives this information in the section: “Conditions – Contract Specifications ”

You can see a list of currency pairs and data on swaps below:

The swaps are for short positions and long positions. If the value is minus, then this swap is negative. And this indication is given for all currencies.

Please note that the interest rates of Central Banks are different, for different currency pairs spreads can be both insignificant and highly visible.

As for example, for USD/MXN:

Swaps for short positions has almost 8 pips in plus. But swaps for long positions has -16,3 pips, but in the negative. This can be very important, especially if you hold the position for a week.

The swap can be viewed in the terminal by moving the mouse on the window “market overview”. Click the right mouse button, select “symbols” and select the required symbol.

Swaps for long and short positions will be listed here. In the photo below you can see that swaps for GBP/USD for long positions are negative and swaps for short positions are negative also.

There is a logical question. Do we need to pay attention to the swaps? One of the obstacles that is in the way of the beginners who want to trade on the daily charts, that is to open positions once a day and analyze positions on the charts D1, where one candle is one day, are swaps.

Beginners think that “since I’m going to pay swaps for holding the position for the next day, then I’m going to suffer some significant losses”. This opinion is not true. Of course if you trade the major currency pairs. If you don’t trade some exotic currency pairs, swaps can be ignored.

Personally I trade on the daily charts and do not pay attention to swaps. As lending rates of the Central Banks of the largest countries are very low, swaps with plus or with minus do not have any significant load. Because, if we take the swap on the same EUR/USD pair, its value is very small and it makes no sense to pay attention to it. Even if you kept the position for 10 days, 5 pips could be accrued to you. As the targets on the daily charts are set at 100 pips, we understand that the swap is negligible.

If you do not keep open positions more than 2 weeks, then you can not pay attention to the swaps. But if you are a positional trader and belong rather to the investors who keep open positions for several months and possibly a year or more, then you should pay attention to the swaps. Because if you keep the position for a year, impressive amount can be accrued during this period of time.

How should you act if you trade while keeping open position for a month or more?

In this case, you will need a swap free account. Nowadays almost all brokers provide the opportunity to create such accounts. When you open it you just need to specify that you want a swap free account. But you should remember that you will be charged a higher commission for the position. The broker has to compensate his losses.

So if you don’t hold positions for longer than a month, then you you should not pay attention to the swaps. Of course if you trade not exotic currency pairs but major pairs.

If you belong to the investors and keep open positions for several months, then you should pay attention to the swap free accounts.

For those who want to delve into the question of swaps, you can go online to see the table of interest rates of the world Central Banks. Enter the phrase into a search engine. And you will see the sites that have this information:

For example, I entered the site FXSTREET .

The table contains the data of the Central Banks of Europe, Australia, Canada, Indonesia, etc. All the data is there. You can see the current bid, the previous value and the date on changing of interest rates.

Carry Trading.

There are also strategies for working with swaps. In general it is called Carry Trade. The essence of Carry Trade is to keep the position as long as possible and get positive swap. Practically, the strategy is aimed to make the swap, but not on the price movement in the direction of our position.

Such strategies are applied to those currencies that have a significant positive swap. It is useless to apply this strategy to the EUR/USD pair. Since swaps are very small. You should choose pairs with high swaps for Carry Trade.

Again, you can find such pairs on the page contract specification s :

Here for example is USD/ZAR pair. Its swaps for long positions are negative. We are not interested in it. But the swap for short positions is 9.48 points. Accordingly, if we will keep the position for long, then we can make good money with these swaps. But this pair has a great spread of 41.48 pips, for this reason it is not interesting to us. Commission for opening of this position is too high.

Let’s look at the other pairs with high positive swaps.

EUR/NZD. Short positions swap is 1.04 pips. But the spread is small and is 3,76. It is a plus for us, as it will not interfere with opening of positions. Does it make sense for us just open a short position and keep it for a long time? What if the currency pair global trend is uptrend? In this case, we are not interested to keep short positions for a long time. We will lose money from rising prices in the long run. So you need to find a pair with a high positive swap and its long-term global trend that lasts for years should move in the direction of the position we are going to trade.

Let’s look at EUR/NZD. Does it have a global trend down?

This pair has no bear trend on the daily chart in general. But if you look ealier at this daily chart, there was an increased tendency down.

So basically you can use this currency pair for Carry Trade. We will open a short position and keep it for a long time, for a month or even a year or more. Of course we will not just enter the position, but I hope that this example has explained to you the essence of the Carry Trade. We will talk about it in detail in one of the following tutorials on our website.

Take care, Michael.

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Understanding Foreign Exchange Rollover.

by Antonio Sousa.

Foreign exchange rollover, what is it?

Rollover is the interest paid or earned for holding a currency spot position overnight. Each currency has an overnight interbank interest rate associated with it, and because forex is traded in pairs, every trade involves not only 2 different currencies but also two different interest rates. However, unlike what many traders think, foreign exchange rolls are not based on central bank rates. Instead, forex rolls are constructed using forward points which are mostly based on overnight interest rates at which banks borrow unsecured funds from other banks. After all, the foreign exchange market works over-the-counter. Market and spot trades need to be settled and rolled forward every day. If the interest rate on the currency you bought is higher than the interest rate of the currency you sold, you will earn a positive roll. If the interest rate on the currency you bought is lower than the interest rate on the currency you sold, then you will pay rollover.

Currently, most forex rolls are low and some are even negative, why?

In the last two years, central banks around the world took a number of measures to increase liquidity and stabilize financial markets. Among the actions taken by central bankers was a significant reduction in overnight lending rates and major injections of capital into the banking system. Eventually, after restoring some confidence on the financial system, central bankers succeeded in bringing down interbank rates. In other words, it became cheaper for banks to lend money between themselves. However, it also meant that the interest paid or earned for holding a currency position overnight would be significantly lower. In this situation, it may happen that both rolls for buying and selling currencies are negative because banks and other foreign exchange market players charge a small spread on interest paid or earned.

How do carry trades work?

Traders looking to “earn carry” will buy a high-yielding currency while simultaneously selling a low-yielding currency. So, assuming the exchange rate remains constant, an investor is able to earn the difference in interest between the two currencies. The foreign exchange carry trade has a successful track record that goes back more than 25 years. However, the recent shift in the world’s financial markets towards lower interest rates and higher risk aversion makes it more difficult to make successful carry trades.

When is rollover booked?

5 pm in New York is considered the beginning and end of the forex trading day. Any positions that are open at 5 pm sharp are considered to be held overnight, and are subject to rollover. A position opened at 5:01 pm is not subject to rollover until the next day, while a position opened at 4:59 pm is subject to rollover at 5 pm. A credit or debit for each position open at 5 pm generally appears on your account within an hour, and is applied directly to your accounts balance.

How do banks account for Weekends and Holidays?

Most banks across the globe are closed on Saturdays and Sundays, so there is no rollover on these days, but most banks still apply interest for those two days. To account for that, the forex market books 3 days of rollover on Wednesdays, which makes a typical Wednesday rollover three times the amount on Tuesday. There is no rollover on holidays, but an extra days worth of rollover usually occurs 2 business days before the holiday. Typically, holiday rollover happens if either of the currencies in the pair has a major holiday. So, for Independence Day in the USA, which is on July 4, when American banks are closed and an extra day of rollover is added at 5 pm on July 1 for all US dollar pairs.

You can view how rollover is counted for holidays using our Rollover Calendar Page .

Why should you invest in currencies, even with low interest rates?

Even though, making carry trades has been less appealing over the last few months, the currency market is still one of the best places to invest. After all, the forex market is still the most liquid financial market in the world with an average daily volume of over US$3 trillion, according to the Bank for International Settlements. This is more than three times the total daily volume of the stocks and futures markets combined. Moreover, with a no-dealing-desk forex broker, every trade is executed back-to-back with one the world's premier banks which compete to provide your broker with the best bid and ask prices. This competition between banks can reduce the potential for market manipulation by price providers.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

Upcoming Events.

Forex Economic Calendar.

Past performance is no indication of future results.

DailyFX is the news and education website of IG Group.