What are Forex swap fees?
A Forex swap refers to a financial transaction in which a fee is either credited or debited to an open trade for holding a position in the market overnight. This fee, known as a swap, is incurred when a position is rolled over to the next trading day. It continues to accrue until the trade is closed.
The close of the trading day is defined as the end of business hours in New York, or 22:00 GMT (London time). Any trades carried over during this time to the next trading day may result in a swap fee.
How does swap work in Forex
In Forex trading, swaps are determined by interest rates, which are set by the respective central bank for the currency in question. These rates are subject to change depending on the central bank's fiscal policies and the prevailing economic conditions.
For instance, when central banks raise interest rates, it leads to higher borrowing costs and encourages savings or deposits. This typically occurs in inflationary environments or when economies are overheating. On the other hand, to stimulate growth, central banks may lower interest rates, making borrowing more affordable and providing incentives for spending and consumption. Low interest rates also prompt investors to seek higher yielding assets, resulting in a shift of assets and investments.
In essence, Forex swap fees represent the interest paid for "borrowing" a currency compared to the interest received for "investing" in another currency. The difference in interest rates between assets or currencies determines whether a swap fee is paid or received.
How do swaps impact trades?
As a trader, it is important to note that Forex swap fees are an additional cost, in addition to spreads and commissions. While the latter are one-time costs incurred when opening a trade, swaps are ongoing costs for the duration of the trade.
All trading costs, including swaps, can be expressed in terms of pips and points. Therefore, it is crucial to consider swaps when making trading decisions, also keep in mind swap rates are not always static, they can differ from day to day.
Please note:
If a position is held overnight on a Wednesday (to Thursday), the normal swap rate is tripled.