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The Biggest Misunderstand About Swap calculator. How it works, And How You Can Use It


February 11, 2020
The Biggest Misunderstand About Swap calculator. How it works, And How You Can Use It

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 accurately. The first thing you need to put in your mind is that the swap is an interest charge that is paid or charged at the end of each session for maintaining an open position for more than one day.

This payment (or charge) is also called overnight interest or rollover.

To understand how the swap calculation works, 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

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. This takes place at 21:00 (GMT + 0) on trades held open at this particular time.

This swap calculator is updated daily to reveal the actual rate swaps that will get used for the day. The fee to be charged depends on your position size, 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;

  • Choose the currency that your account is based on
  • Select the currency pair that you would like to know the rate swaps.
  • Based on lots, enter the trade size and choose the leverage.
  • Click on the convert button and the swap calculator will automatically show the rates.

These rates vary depending on the interest rate differential between the two currencies used. This swap calculator is faster and accurate as it uses algorithms to make these calculations.

This is the Swap definition as used in the finance industry

A swap represents a contract between two parties to exchange financial instruments for a certain period. Most swaps involve cash based on a specific principal amount, but they can be anything. Swaps are primarily contracts between financial institutions or companies.

Most retail investors do not engage in swaps. Swaps help companies receive interest rate savings from their markets by combining the privileged access they have. Swapping also enables companies or investors to revise their debt conditions to take advantage of expected market conditions.

However, some risks do occur; hence swapping should be done with much caution.

Now that we covered that let’s reveal what does swap mean in Forex

A swap in Forex refers to the interest that a trader or an investor earns or pays for a trade that he or she keeps open overnight. They depend on the financial instrument you are trading and usually comes expressed in pips per lot. There are two types of swaps;

  • Swap long, this type of swap gets used to keep long positions open overnight.
  • Swap short, it is used for keeping short positions open overnight.

The amount of swap to be charged depends on a variety of factors including; market price action, the price movement of the currency pair and interest rates in the two countries.

This is what the swap rate is

A swap rate is the specific rate of a swap selected by the parties involved in the contract. It is 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.

Therefore, it acts as the market’s quoted price for entering the swap. This rate is debited to or credited from a client’s accounts when a position is kept 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 effectively.

These rates can get applied in the following categories of swaps

  • The interest rate swaps are the most common type of swaps rates used.

This type of rate swap comes based on the interest payments for a specific principal amount, and it involves the exchange of cash flows between two parties.

However, the principal amount is not exchanged. Instead, a fixed payment is exchanged for a floating payment and 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 type of loan depending on its comparative advantage.

  • Currency swap that involves exchanging fixed-rate interest payments on a loan and principal 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 in opposite currencies.

This swap is considered a foreign exchange transaction hence it is usually not shown on a company’s balance sheet. Therefore, debts from swaps might not be presented in a company’s financial statement.

These are the rules for swap calculation

Units of the base currency of the instrument are used in swap calculation for currency pairs. Basically, it is calculated using the following formula;

Swap= (contract size *(interest rate differential+markup)/100)/days per year.

Swap calculation for CFD stocks and metals is calculated in percentage. Swap is usually represented as an annual interest rate on the web site of the company. Swap is charged in intervals. when a swap is charged, the base currency rate to currency of deposit ratio is taken.

The formulas and calculations are done by the swap calculator hence there is no need of memorising them.

Here is how to calculate swap points using a swap calculator.

Swap points refer to the difference between the spot rate and the forward rate for a certain currency pair when expressed in pips. Interest rate parity is the economic concept that is used to compute these points.

This theory states that the returns received after investing money in various currencies should equate irrespective of their interest rates. The fundamental equation used to calculate these points is;

Swap points=forward price-spot price.

Basically, swap points refer to the difference in interest rates between currency pairs. You will get swap points(profit) when you purchase a currency with a high-interest rate and roll it over the next day.

However, you will be required to pay swap points(losses) if you apply for a short position. Hence it is important to understand the number of pips that will be charged on your position before holding the position overnight.

Is it possible to avoid the swap? Yes, and here is how you can avoid the swap in Forex

In order 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. However, this is not recommended unless trading in that direction has been the most favourable in terms of profit returns.
  2. Consider a swap-free Islamic account that is offered by some brokers.
    This account is offered to Muslim clients and is run in full compliance with Islamic cultures, beliefs, and policies. In most cases, there is no interest paid upon any business transaction.
  3. Trade during close positions and intraday
    One can avoid paying swaps during these periods because you are trading before rollover time. This strategy is advantageous but you should not opt for it because of the swaps.

The above strategies will help you realise greater returns since you will not be paying swap points.

A Forex calculator and its importance

A forex calculator helps you make trading decisions in the foreign exchange market. You should consider the potential profits, costs to trading and losses. This trading calculator provides all the risk factors hence a trader should use it to determine his or her risks of trading. This calculator is easier to use as follows:

  • Choose and enter the instrument you want to trade.
  • Choose your account currency
  • Set the preferred leverage
  • 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. Basically, 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 and incurs a cost when a negative rollover rate occurs.

It is computed based on the difference between the interest rates of the traded currencies. Most positions are rolled over on a daily basis. Calculation of rollover rates is generally not required as most forex exchanges display the rates.

Consider this about the calculation of financing fees & charges

Financing fees are accrued when you have an open order in your account. This is because the position is considered to be held overnight hence a fee is charged to reflect the cost of funding that position. The financing rates depend on the instrument and may vary on a daily basis.

Each position incurs a financial cost. The financial cost or credit will be reflected in your transaction history as it is passed to your account on a daily basis. Fortunately, there are no financial costs or credits imposed on a client’s account over the weekend.

Market mark as a solution

This is a procedure used to obtain the market value of assets and liabilities through revaluation of prices daily. This procedure gives the realistic picture of a trader’s financial position as 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.

Categories: Trading , Education

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