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Swap Calculator Explained. How it works!


January 4, 2021
A swap calculator is used by investors to determine the interest they will earn or pay for a trade that they keep open overnight. The interest will either be credited or debited depending on the interest rates of the two currencies in pairs.
Swap Calculator Explained. How it works!
Updated!
When you decide to trade in FOREX, it is necessary for you to know and understand what the swap is.
 
Here we cover all about the swap and the tool used to calculate it fast and. First, you need to keep in mind that the swap is an interest charge paid or charged at each session’s end. The payment covers keeping an open position after the changing of a trading day on the broker’s server.
 
This payment (or charge) is also called overnight interest or rollover.
 
We will cover all the concepts you need to know and use to protect your trading experiences.
 
Let’s go deep into what a Trading Swap Calculator is
 
This swap calculator gets updated daily to reveal the actual rate swaps used for that trading day. The fee to get charged depends on your the size of your open position. Also, the instrument you are using and your account currency.

How does the swap calculator work?

This swap calculator is simple and easy to use; hence it is convenient for most investors. It requires a few steps as follows;
  1. Choose the currency that your account got based on
  2. Select the currency pair that you would like to know the rate swaps.
  3. Based on lots, enter the trade size and choose the leverage.
  4. Click on the convert button and the swap calculator will show the rates.
These rates vary depending on the interest rate between the two currencies used. The swap calculator is fast and accurate. It uses algorithms to make these calculations.

Swap definition as used in the finance industry:

A swap is a contract between two parties to exchange financial instruments. Most swaps involve cash based on a specific principal amount, but they can be anything. Swaps are contracts between financial institutions or companies.
 
Most retail investors do not engage in swaps. Swaps help companies receive fees from their markets by combining the privileged access. Swapping enables investors to revise their debt to take advantage of market conditions.
 
Yet, some risks do occur; hence swapping should get done with much caution.
 
Now that we covered that, let’s reveal what does swap mean in Forex.
 
A swap in Forex is the interest that a trader or an investor earns or pays for a trade that they keep open overnight. They depend on the assets you are trading and usually comes expressed in pips per lot. There are two types of swaps;
  1. Swap long, this type of swap gets used to keep long positions open overnight.
  2. Swap short, for keeping short positions open overnight.
The amount of swap to get charged depends on various factors, Including price action. Price action is the price movement of a pair and interest rates in the two countries.

What is the swap rate?

A swap rate is the specific rate of a swap selected by the parties involved in the contract. Demanded by a party that receives a fixed rate from a buyer. It is a fixed rate and swaps gets generally quoted in this rate.
 
So, it acts as the market’s quoted price for entering the swap. This rate gets debited to or credited from an account when a position remains open overnight. When a trading position gets rolled over, the rate is either credited or debited once for each day of the week.
 
A swap calculator helps in calculating these rates.
 
These rates can get applied in the following categories of swaps:
  1. The interest rate swaps are the most common type of swaps rates used.
    This type of swap comes based on the interest payments for an initial amount. It involves the exchange of cash flows between two parties.
    Yet, the principal amount is not exchanged. Instead, a fixed payment gets traded for a floating payment. The principal amount remains the same for both parties.
    This swap can transform a fixed-rate loan into a floating rate loan or vice versa.; Hence companies can borrow any loan depending on its comparative advantage.
  2. Currency swap that involves trading fixed-rate interest payments on a loan. In one currency for the same in another currency.
    Comparative advantage also plays an important role in this swap. Swapping involves cash flow in both directions but opposite currencies.
    This swap gets considered a forex transaction; hence it is usually not shown on a balance sheet. So, debts from swaps might not get presented in a company’s financial statement.

How to Calculate the Swap:

Units of the base currency of the instrument get used in swap calculation for currency pairs. It gets calculated using the following formula;
 
Swap= (contract size *(interest rate differential+markup)/100)/days per year.
 
Swap calculation for CFD stocks and metals gets calculated in percentage. Swap is usually represented as an annual interest rate on the web site of the company. Swap gets charged in intervals. When a swap gets charged, the base currency rate to currency of deposit ratio gets taken.
 
The formulas and calculations get done by the swap calculator. There is no need of memorising them.

How to Calculate Swap Points Using a Swap Calculator.

Swap points refer to the difference between the spot rate and the forward rate. And for a certain currency pair when expressed in pips. Interest rate parity is the economic concept that gets used to compute these points.
 
The returns received after investing in currencies should equate irrespective of their rates. The fundamental equation used to calculate these points is;
 
Swap points=forward price-spot price.
 
Swap points refer to the difference in interest rates between currency pairs. You will get swap points (profit) when you buy a currency with a high-interest rate and roll it over the next day.
 
You will need to pay swap points(losses) if you apply for a short position. It is important to know the number of pips to get charged before holding the position overnight.
 
Is it possible to avoid the swap? Yes, and here is how you can avoid the swap in Forex.
 
To maximise your profit, you should avoid paying rate swaps. There are three major ways you can avoid swap point charges:
  1. Always trade in a position of positive interest. You can consider trading only in the direction of the currency that provides a positive swap. Yet, this is not recommended unless trading in that direction yielded good profit.
  2. Consider a swap-free Islamic account, offered by some brokers. This is a type of account special to Muslim clients. It runs in full compliance with Islamic cultures and policies. In most cases, there is no interest paid upon any business transaction.
  3. Trade during close positions and intraday You can avoid swaps during these periods because of trading before rollover time. This strategy is helpful, but you should not opt for it because of the swaps.
The above strategies will help you get greater returns since you will not be paying swap points.

Why is a Forex calculator important?

A forex calculator helps you make trading decisions in the foreign exchange market. It would be best if you considered the potential profits, costs to trading and losses. This calculator provides all the risk factors.; So, a trader should use it to determine his or her risks of trading. This calculator is easier to use as follows:
  1. Choose and enter the instrument you want to trade.
  2. Choose your account currency
  3. Set the preferred leverage
  4. Choose the trading platform that you are trading on.

What are Forex rollover rates?

The rollover rate is the net interest return a position held overnight by a trader. It is the interest paid or earned when an investor borrows one currency to buy another. An investor gains when there is a positive rollover rate. The opposite when a negative rollover rate occurs.
 
It gets calculated based on the interest rates of both traded currencies. Most positions get rolled over daily. Calculation of rollover rates generally does not need to display the rates.
 
Consider this about the calculation of financing fees & charges.
 
Financing fees get accrued when you have an open order in your account. Because the position gets considered to remain open overnight. Hence a fee gets charged to reflect the cost of funding that position. The financing rates depend on the instrument and may vary daily.
 
Each position incurs a financial cost. The financial cost or credit will get reflected in your transaction history. It gets passed to your account daily. There are no financial costs or credits imposed on a client’s account over the weekend.

Market Mark as a Solution

This gets used to get the market value of assets. Also, the liabilities by revaluing prices daily. This procedure gives a realistic picture of a trader’s financial position. Because it reveals the current prices in the market. If a trader has a long position, it is ideal to sell during the mark to market calculation price.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances or needs.

Risk Warning: Our products are traded on margin and carry a high level of risk and it is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved.

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