What is swap?
A swap in Forex and CFD instruments is an operation of money depositing or in the opposite case a withdrawal for moving to the next day an open position.
In Forex and CFD ecosystem, margin trading is widely used, which allows traders to use loaned money to get large leverage. Eventually, when a certain position is held overnight, i.e. moved to the next day, the rules of interbank crediting that are used all over the world, come into place.
Swaps on Forex are also called the rates. The rate is the interest rate banks charge each other for borrowing or storing money. Particular Central banks of each country apply their own monetary policies with their inner currencies. In major terms, when you buy for example EUR/USD pair, you buy the base currency (EUR) currency and sell (loan) the quote (USD) currency. Vice versa is applicable for sell operation.
The key point is the bigger the difference between the rates of the bought and sold currencies in the pair – the larger the swap is. Depending on our positions (buying or selling a particular currency pair), a swap will be either deposited on the account or it will be withdrawn from the account.
In common terms, a positive swap means a swap that is being deposited on the account of a trader for each overnight transfer of a position. It happens when you are buying a currency with a high interest rate and on the contrary selling a currency with a low interest rate. As an example, for selling USD/TRY, a positive swap will be deposited on the trader’s account. By selling USD/TRY currency pair, we sell the dollar with a low interest rate (of 0.0%) and buy the Turkish lira with a high rate (of 12%).
A negative swap means a swap that is withdrawn from the account for each transfer overnight of a position. It occurs when you are buying a currency with a low interest rate and selling a currency with a high interest rate. As an example, when buying USD/RUB, a negative swap will be withdrawn on a daily basis. It happens when we buy the dollar with a low rate (of 0.0%) and sell the Russian rouble with a high rate (of 4.25%).
Figure 1. Swap rates of countries (%)
The deposited/withdrawn swaps amounts depend on the difference between the rates of the currencies at first and the conditions on which the selected broker works with liquidity providers or credit organizations. There exist brokers that have negative swaps for both long and short positions which is certainly unfair and the broker just grabs the trader’s profit for holding a position in his pocket. Read our broker reviews to find a fair and trustworthy broker.
Usually, the swaps for all the currency pairs are deposited/withdrawn every day (usually, at midnight (UTC) server time) but there is one obstacle: on Wednesday night, the swap is being tripled. Though on Friday night, when the position is held over the weekend till Monday, the swap is kept single. It happens because since the position opened on Wednesday the valuation date (i.e. a specific date when the trade conditions are fulfilled because of T+2 supply/demand regime) is Friday.
Swap in MT4 location
The novice traders usually find it difficult to discover the place where to find the swaps of the instruments. Though in fact, it is quite easy to do and then you will be able to answer what is swap on MT4 without any problem. You just have to go to Market Watch of the MetaTrader 4 terminal, press the right button on the desired instrument, and select Specification. Afterward, a window with various information about the instrument including Swaps will appear.
The most important values are ‘Swap long’ and ‘Swap short’. They are usually measured in points for easier calculation. It is also a good idea to have a look at the ‘3-days swap’ string that is reflecting the day when the triple swap (over-weekend T+2) is charged.
When using swing or investment strategies, i.e. when a position is planned to be held for some time, it is better to evaluate the swap’s influence on the trade. That is why every single trader that is holding positions overnight has to familiarize the information on the website of the broker attentively. Alternatively, the broker may change swaps from time to time that is why the best choice is to get swaps in a popular trading terminal MetaTrader 4. To see the swaps, a trader should right-click in the Market Watch on the currency pair or any desired asset and forward to “Contract specification”.
The main point is that it is time-consuming to move instrument by instrument to see the swap sizes. That is why the Swap indicator has been created to ease the trader’s life. In this indicator, it is possible to choose the desired assets list and monitor all of the swaps in one place.
Figure 2. Swap indicator
How to earn on swaps?
The difference between the interest rates, mentioned above, allows to receive some extra profit or even be a separate trading strategy. It is based on using positive swaps and in the investment world is called Carry trading. The basic point behind this strategy is holding positions with a positive swap and getting income out of it.
To get maximal profit, a currency pair or another asset with a high positive swap should be chosen. Instead of clicking hundreds of instruments, you can display as many symbols as you want in Swap Indicator to see the biggest and the lowest possible rates in one place. By entering positions that on a daily basis generate a positive swap for holding may be a very nice way to earn money in the market.
Though when utilizing swaps, the trend should be taken into account because it should go either in the direction of the positive swap or at least there should be a wide price range that will not affect the profits gained with carry trading.
Figure 3. Swap indicator
It is also a good idea to monitor as many instruments as possible to catch the best opportunities and not to miss the new appeared ones because swap rates always change.
Swap indicator allows displaying even all the symbols that the broker has so you can always get actual information about the swap rates and can react accordingly.
Swap indicator settings
The supply and demand indicator has a big number of settings that allow to customize it in many ways.
Figure 4. Settings of Swap indicator
All the inputs of Swap Indicator could be divided into several groups:
- Symbols list. There are available 3 methods of selection that allow monitoring of the desired assets list: – Select instruments from Market Watch
– Select all available instruments in terminal
– Select instruments from the manually adjusted list
- Distance settings. Every trader has different setups of the trading terminal with various screen resolutions, window arrangement, and others that is why in the indicator there are customizable distances between the rows, strings, and columns.
- Symbols in a row. It is up to a trader how many symbols per row to display that is why this setting is available in the indicator also.
- Color and font settings. Each input like header, symbol name, positive and negative swaps could be adjusted upon to the desired color scheme and without any limitations. The font size of the elements could be changed too.