Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 64.29% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

64.29% of retail CFD accounts lose money.

Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 64.29% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Swap-Free Forex Accounts: Learn How to Trade without Interest Charges – JustMarkets

Thanks to online platforms, trading in the Forex market has become easier for everyone. Now, anyone with internet access can sign up, deposit an account, and start trading whenever they want. However, some traders have religious beliefs that affect how they trade. That’s where swap-free Forex accounts come in handy.

In Islam, interest and certain types of buying and selling are not allowed. Swap-free Forex trading accounts help traders follow these rules by not charging or giving any interest on trades held for a certain time. Muslims use these accounts to trade in the Forex market according to their religious beliefs.

What is Swap in Forex Trading?

What does swap mean? In finance, a swap is a financial agreement between two parties to exchange cash flows or other financial instruments. A swap-free account in Forex trading is like a special account where you won’t be charged extra for holding onto trades overnight. Normally, there are fees called swaps or rollovers for this, but with a swap-free account, you don’t have to pay or receive any extra interest on your trades. People also call this an Islamic account because it follows Islamic finance rules.

These accounts allow traders with certain religious beliefs to participate in Forex trading without dealing with specific fees related to swaps or interest. They’re kind of like a specialized option for people who want to trade in line with their beliefs.

Understanding Swap-Free Trading Accounts

Swap-free accounts are similar to regular Forex trading accounts but with a notable difference: they don’t have any swap charges. Now, what are swap charges? They’re the interest fees you might usually pay or receive when you keep a trade open overnight.

You won’t be dealing with these interest charges in a swap-free account. However, there’s a catch. Instead of these swap fees, the broker charges you a fixed commission for each trade. This commission is higher than you might find in a regular trading account.

So, why does the broker charge this commission? It’s to cover the costs linked with hedging the positions overnight. Hedging is like a safety net – it’s a way to protect your trade from potential losses by making another trade that goes in the opposite direction.

In a swap-free account, the broker needs to do this hedging for every trade left open overnight because they can’t apply or get any interest charges like they would in a regular account. That’s why they charge this higher commission to manage these costs.

How are Swap Fees Calculated?

Here’s how swap fees Forex are calculated:

  • Interest Rate Differential: Swap fees are influenced by the variance in interest rates set by central banks for the respective currencies in a currency pair. Each currency has its own interest rate, and the difference between these rates is what contributes to the swap rate.
  • Long vs. Short Positions: If a trader holds a position past the daily cut-off time, they may either pay or earn swap fees depending on the direction of their position (long or short).
    • Long Position: If a trader buys a currency pair and holds it overnight, they essentially borrow the currency with the lower interest rate and earn interest on the currency with the higher interest rate. They might receive credit for holding the position even in low-spread Forex brokers.
    • Short Position: Conversely, if a trader sells a currency pair and holds it overnight, they are effectively borrowing the currency with the higher interest rate and paying interest on the currency with the lower interest rate. They may incur a debt for holding the position.
  • Broker’s Markup: Some brokers might add or subtract a markup to the interest rate differential, affecting the final swap fee.

Various factors, including central bank interest rate changes, market volatility, and broker policies, can influence swap fees.

Benefits of Swap-Free Accounts

Here are some of the swap-free account key advantages:

  • Compliance with Islamic principles: Swap-free accounts provide a way for Muslim traders to participate in the Forex market without violating Islamic principles that prohibit charging or receiving interest.
  • No overnight fees: With swap-free accounts, traders can hold positions overnight without incurring any overnight fees.
  • Equal trading opportunities: Swap-free accounts ensure traders have equal access to the Forex market independently of their religious backgrounds.

Risks of swap Forex

While swapping can offer potential benefits, there are some important risks to know about:

  • Market Risk: Like any trading, swapping depends on how currency values move. Big swings can bring profit or loss.
  • Liquidity Risk: Some currencies in swapping aren’t traded much. That can make selling what you’ve bought hard, leading to higher costs or losses.
  • Counterparty Risk: When trading with others, there’s a chance they might not stick to their deal. That could mean losing money.
  • Regulatory Risk: Trading rules can change, affecting swapping. Keeping up with new rules is crucial.
FAQ Section
  • A: A foreign exchange swap is a simultaneous purchase and sale of identical amounts of one currency for another currency with two different value dates. It involves the exchange of principal and interest in one currency for the same in another currency. Foreign exchange swaps are commonly used to hedge or obtain funding in different currencies.
  • A: The foreign exchange swap strategy involves taking advantage of the interest rate differential between two currencies (carry trade strategy). Traders who employ this strategy borrow a currency with a low interest rate and use it to buy a currency with a higher interest rate. By holding the position overnight, they can earn interest on the currency with the higher interest rate while paying a lower interest rate on the borrowed currency.
  • A: The valuation of a foreign exchange swap takes into account the interest rate differential between the two currencies involved in the swap. The present value of the interest payments is calculated using the prevailing interest rates and the time remaining until the swap matures. This valuation helps determine the swap’s fair value and enables traders to make informed decisions.
  • A: Currency swaps are agreements between two parties to exchange a specified amount of one currency for another currency at a predetermined exchange rate on specified future dates. These swaps are often used to hedge against currency risk or to obtain funding in different currencies. Unlike foreign exchange swaps, currency swaps involve the exchange of principal amounts and interest payments.
  • A: Swap cost in Forex refers to the fee charged or earned for holding a position overnight. If the interest rate of the bought currency is higher than the sold one, the trader earns a swap. Conversely, if the interest rate of the currency being sold is higher, the trader pays a swap.
  • A: An example of a swap is a fixed-for-floating interest rate swap. In this type of swap, two parties exchange payments with fixed interest for payments with floating interest. For example, Party A might agree to pay a fixed rate of 3% in exchange for Party B paying a floating rate based on the London Interbank Offered Rate (LIBOR).
  • A: A swap trade is when two parties exchange financial instruments or money movements. Swaps are popular in finance, and folks use them for various reasons. One big reason is to lower the risk when interest rates change or to shield themselves against currency fluctuations. Some swaps are common, like interest rate, currency, and credit default swaps.
  • A: People trade swaps for a variety of reasons. Some common motivations include managing risk, hedging against adverse market movements, obtaining funding in different currencies, or speculating on interest rates or currency movements.
  • A: First, there’s market risk – the value of what you’re trading can go up or down, affecting your potential profits or losses. Then there’s liquidity risk, which means you might struggle to buy or sell in less active markets, making it harder to get in or out of trades.

    Another risk is counterparty risk. This happens when the other party in the swap can’t fulfill their end of the deal.

  • A: Swaps are a type of derivative instrument. Derivatives are financial contracts that derive value from an underlying asset, index, or reference rate. Swaps are bilateral agreements between two parties to exchange cash flows or financial instruments.

by JustMarkets, 16.04.2024


Disclaimer: This is not investment advice and/or investment research. The content of this material is intended for educational/informational purposes only and does not contain nor should be considered as containing investment advice/research and/or recommendations. No opinion given in the material constitutes a recommendation by JustMarkets Ltd or the author that any particular investment decision is suitable for any specific person.

Although the information sources of this material are believed to be reliable, JustMarkets Ltd makes no guarantee as to its accuracy or completeness. Neither JustMarkets Ltd or the author of this material shall be responsible for any loss that you may incur, either directly or indirectly.