What is swap in trading?

We define the Swap in trading as that commission that is paid or charged at a certain time at the end of the daily session. The reason for this commission is so that a position remains open for a period of more than one day. We remember that an open operation will be capable of generating either profits or losses. On the other hand, a trade that is closed means that it will stop trading and consequently will not be active.

Understanding the swap in trading

First of all, it must be borne in mind that when you open a position in FOREX you are buying or selling two currencies. In this way, the purchase (and sale) of each of them will depend fundamentally on the type of position, where long are related to buying and bearish or short positions are related to short sales.

When you buy a stock in order for it to rise, you are trading long positions and returns are expected over time. On the other hand, if the market is continuously fluctuating, the normal thing is to use a short position and sell quickly so as not to lose that profitability that has been.

To explain the Swap we will use the EUR / USD pair as an example:
  • In the case of long position of the purchase order, it will be bought in euros and sold in dollars. Here, dollars are sold to “finance” the purchase of euros, since it is believed that the euro will appreciate against the dollar.
  • However, in the case of a short position in the sell order, euros will be sold to buy dollars. Now, euros are sold to finance the purchase of dollars, because it is believed that these are going to devaluate against the dollar.

We will need to know if the positions are going to be held for more than one day and if so:

  • A certain interest will be paid for the currency to be sold, which will finance the purchase of the other currency.
  • A certain interest will be charged for the currency that is purchased or, for the currency that, we believe, will increase.

The net result between these two interests is called Swap, which may be positive or negative. If the interest on what is sold is higher than what is bought, this swap will have to be paid. On the other hand, if the interest in the currency being sold is lower, there will be a profit. With this example, we can say that the swap will depend on the one hand, on the interest rates associated with the currencies of the pair that we are using, and on the other, on the type of position.

Calculating the Swap in trading

We use another example that is the most practical to explain it, in this case with the EUR / AUD (Australian dollar) pair. We assume that a trader believes that this currency pair is going to depreciate, thus opening the day short. At the end of the day, what he thought actually happened, so he decides to keep the position open. In this case, when opening short the trader sells euros and buys Australian dollars, but also when the position remains open for more than one day.

  • He will have to pay the euro interest rate, we assume it is 0%.
  • He should charge the interest of Australian dollars, we assume that it is 3%.

The calculation is made based on daily interest, for example, the daily swap is approximately 0.0055% and is applied to the total amount of the open position. Then the net result will be the interest charged subtracting the interest paid, which in our case will be 3% – 0% = 3%. With what in this case the Swap gives rise to a positive income for the trader. It should be noted that the longer an open position is, the greater the impact on the economic result, whether positive or negative.

Make money with the Swap

It is really not as easy as it may seem and there are true experts only in this type of operation who study the feasibility almost exclusively. The trader who focuses on this is called a carry trade and to achieve profits the essential thing is to choose a low-interest currency and the other one with high interest. In some cases, carry traders look for more exotic currencies that tend to have a higher interest rate such as the Russian ruble. With time and dedication, of course, you can make money with the Swap in trading, but it requires study and effort.

If you are interested in trading Swap and need training to get started, at TradEAsy we offer you our automated trading training courses. In addition, for those traders who have some experience and what they need are plans with everything they need to trade, we also provide support Get in touch with us and schedule a call, our department will offer you the best solution.

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