What Is Swap In Trading? How To Avoid It?

Swap charges, also known as rollover fees or overnight fees, are costs associated with keeping a forex trade open overnight. In forex trading, currencies are traded in pairs, and each currency has an interest rate set by its respective central bank. When you hold a forex position overnight, you essentially borrow one currency to buy another, and the difference in interest rates between the two currencies determines whether you earn or pay a swap charge. Swap charges can be either positive (earning interest) or negative (paying interest) depending on the interest rate differential. In this article, we will discuss the meaning of swap and how traders can avoid it. 

When Is Swap Charged?

Swap charges are typically applied at the end of each trading day, precisely at 5:00 PM Eastern Standard Time (EST). This is because the forex market operates globally, and the end of the trading day in New York signifies the beginning of a new trading day. However, please note that swap charges may vary depending on the broker and the specific currency pair being traded. It’s essential to understand the terms and conditions of your broker regarding swap charges as they can affect your overall trading costs

How To Avoid Swap?

To accommodate religious requirements in finance, particularly Islamic finance, which forbids the payment of interest, many brokers now provide swap-free accounts. Swap-free trading accounts are therefore referred to as “Islamic” or “Shariah” accounts in the industry.

Instead of an interest-based rollover payment for swap-free accounts, the broker imposes a fixed fee. Regardless of whether the swap rate for the underlying currency pair is typically positive or negative, this fee will always be deducted from the account. In reality, anyone can open an Islamic account, but there are some brokers that demand documentation of a client’s religious affiliation.

Thus, you should carefullly select a forex broker. Here are a few things to look out for

  • Understand the Concept: A swap-free broker offers trading accounts without charging or paying overnight swap charges, which can be beneficial for individuals following certain religious beliefs or trading strategies.
  • Account Eligibility: Check if the broker offers swap-free accounts and if you meet the criteria for eligibility. Some brokers may require specific conditions or proof to open a swap-free account.
  • Account Features: Evaluate other features of the broker’s swap-free account, such as leverage, spreads, commissions, and available trading instruments. Ensure they align with your trading preferences and goals.
  • Broker’s Reputation: Research the broker’s reputation and credibility. Look for reviews, licenses, and regulatory compliance to ensure you’re dealing with a trustworthy and reliable broker.
  • Terms and Conditions: Read and understand the terms and conditions of the swap-free account. Pay attention to any additional fees, limitations, or trading restrictions associated with the account.

In conclusion, muslim traders should take current swap rates into account when planning their trading strategy because any type of interest is forbidden in their religion. The swap rate is swapped out for a fixed fee in Islamic or Shariah accounts as they do not accept interest-based payments. This helps them trade while abidling to their religious principles.