Are you finding it challenging to understand what is swap in forex? If yes, then don’t worry, as you are not the only one, and almost every beginner finds it a daunting task to comprehend swamp and its related terms.
In layman’s terms, we can define swap in forex as the interest payment that you collect or settle for overnight carrying position into the next day. Swamp can affect the strategy of your trading, and they are pretty perplexed too. So, in this article, we will explain it in detail; therefore, without wasting any time, let’s dive straight into the details.
Who fixes the Forex Swap Rates?
If you want to know from where these swap rates have come and who introduced them, it is worth mentioning that central banks originate rates. But if you are a retail forex trader, you are some miles away from trading with banks.
The swamp rates that we usually get from brokers gradually get lower, and soon, the profit from the positive swamp rates will become impossible. But there is nothing to be worried about this as there is a massive difference between banking and online forex trading.
What is the procedure for calculating swaps?
When someone hears about the word swamp, they assume that it must be expressed in percentage related to interest rates. But it is not correct, and in reality, the points are usually used for expressing swaps. If you wonder why it is represented in points, then keep in mind that the reason behind it is the representation of Profits, Commissions, and spreads in either Points or Pips.
Let me explain how you can calculate the swamp rate with the assistance of an example. But before jumping to that, it is pertinent to mention that the swamp rate for Euro vs. USD is usually -4.83 points in long positions. On the flip side, the swamp rate in the case of short positions is -0.81.
Now, let’s suppose that you have a long position and its value is 0.4. Furthermore, the balance in your trading account is in GBP (Great British Pounds). Therefore you should know that the currency rate of GBP vs. USD is 1.31. So, it is all the data that we require for calculating the swamps.
Pip value=$20
Swamp rate in pips=-0.483
Position size=0.4
Multiply all these values we get $-3.864
Now divide this value with currency rate $-3.864/1.31=2.95 GBP
Some crucial terms related to swamps
Understanding swamps is not easy at all, especially if you have no information related to finance. You need to pay the swamps in every case. Even if you have a Swamp-free trading account, you will still have to pay the swamp by the end of every day. If we talk about the US, the trading usually ends at 4:59 pm. If you want to comprehend swamp thoroughly, it is highly significant to know about the following terms.
Let’s begin with the swamp rate. It is the rate set by your broker, and usually, it alters from day today. Furthermore, it also varies according to the trading pair.
Another thing that you should know is the size of your position. Always remember that if the position’s size is more extensive, you will collect or pay more. Swamps rates vary; the direction trading strategy you are following can either be short or long.
When it comes to swap, another thing that you must have to understand is how it ranges depending upon the day of the week. Lastly, we want to mention another factor that can affect the swamp is the currency of your trading account.
Final Words
To sum up the article, we would like to say that never overlook swamp rates when you plan to start forex trading. Try to learn how you pay and receive them. We are hopeful that now you must understand “what is swamp in forex?”If you have any queries, you can ask in the comments section.
