What are swaps and rollovers in forex trading?

Swap

Transactions that are done with cash (spot forex) with foreign exchange brokers are subject to positive or negative interest charges (currency swaps) if the positions are held at the time of the rollover at 22:00 (GMT time).

For example, for the EUR/USD pair, the credit or debit that is applied to a trader's account is determined by the difference between the interest rate of the base currency (EUR) and the counter-currency (USD).

To calculate the interest, we need to know the short-term interest rates of the two currencies and the amount of currency that was bought. For example, let's say that the investor holds a long EUR/USD position (10,000, or 0.10 lots) and that short-term interest rates are 0.05% for the euro and 0.25% for the US dollar.

In this case, the daily interest is [{10,000 x (0.05% - 0.25%)} / 365] = -0.0548$

Forex trading consists in buying or selling the base currency with the counter-currency which is the means of payment. In our example, the interest is in dollars (the counter-currency), but it is automatically converted into the account's currency, for example in euros if the balance of your account is denominated in euros.

With a long position, the trader is a buyer of euros and simultaneously a seller of dollars. The interest is therefore debited from the trader's account because he is earning 0.05% on the euro, but is losing 0.25% on the dollar, a difference of -0.20% over a full year. To know the daily interest amount, divide the result by 365 days.

Conversely, if the base currency's short-term interest rate was higher than the counter-currency's short-term interest rate, the interest rate would have been positive. It would also have been positive if the trader had shorted the EUR/USD (selling euros and buying dollars).

 

Rollovers over weekends and on bank holidays

Banks are closed on weekends, but they continue to charge interest. Most forex brokers therefore bill traders for three days of rollover on Wednesdays. There is no rollover on bank holidays, but some brokers apply an additional rollover two business days after the holiday.

The rollover isn't calculated in relation to the margin used, but on the basis of the total value of a trade. For example, for 1 lot of EUR/USD, interest will be calculated on the value of 1 lot or $100,000.

It is also important to note that the rollover is not a charge for the use of leverage. The debit or credit is based on the difference between the interest rates of the countries involved in the currency pair.

 

Do rollover policies vary among brokers?

Some forex brokers state that they only apply the interest rates of central banks, other say they reserve the right to modify them according to market conditions. But in reality, almost all brokers modify rollovers in their favour. In addition to making money through the spread, they make money with rollovers as well. All you need to do is compare the various rates offered by forex brokers to notice that they are all different and sometimes the two rates (for longs and shorts) are negative.

As the monetary policies of central banks are determined by a number of economic factors, interest rates can therefore also be modified by central banks.

At the time this article was written, central banks' interest rates were 0.05% for the EUR and 0.25% for the USD. In the table below, however, you will notice that no forex broker really offers these rates.

  Value of the EUR / USD swap in pips
 Long (Buying) Short (Selling)
Actual bank rates-0.05+0.05
ActivTrade-0.07+0.03
Pepperstone-0.175+0.067
FxPro -0.118+0.00
XM-0.36-0.17
IronFX-0.229-0.192
XTB-0.353-0.206

 

Carry trade (carry strategy)

With a broker that offers a positive rate, a currency trader can use the carry trade technique (carry strategy), which consists in holding positions for a long time in order to cash in the positive swaps.

In order for this technique to work, you must find a currency pair with a long-term trend that is going in a direction that favours carry trade, otherwise the rollover will not compensate for the loss on the position and the cost of the spread. You must also choose currency pairs with an attractive interest rate differential and monitor the rates each day to make sure that the broker doesn't change them.

 

How do I find swap rates in MetaTrader 4?

To find your broker's latest swap rates in MetaTrader 4:

1. Menu / display / symbols

2. Select the currency pair and click on Properties

The swap (long or short trade) is shown in points, the 5th decimal place after the period if your broker offers fractioned pip quotes. (Ex: 1 point = -0.10 pip)

Previous: The main forex currencies Next: The advantages of forex trading