Currency swap (swap) in simple words

Traders who leave open positions overnight are faced with a small amount deducted from their accounts. This amount is usually calculated in several points and is deducted at 21:00 GMT. As a result, your open position may shift slightly up or down the chart, depending on whether the difference is positive or negative. Together, these points form currency swap (from english swap – exchange).

How is a currency swap formed?

The forex market works around the clock 5 days a week. But, in spite of this, world legislation requires that at the end of the day, at 21:00 GMT, all open positions should be closed and settlements made in real money based on the results of these transactions.

At this time, there is a movement of funds through the accounts of all customers in all world banks. However, traders are least interested in cashing out, since the main benefit for them is currency turnover, not cash.

To avoid cash payments on accounts, brokers close all open positions of traders at exactly 21:00 GMT and open new ones with the same trading volumes of funds. It is this operation that is called currency swap

How is currency swap calculated?

When exchanging currencies, an important indicator is the interest rate differential – the difference in the discount rates of the central banks of the countries with the national currencies that you work with. It is this difference that lies in currency swap… If you bought a currency for which the discount rate is higher, then you will receive a positive swap difference, if you sold – a negative one.

The formula for calculating a swap with a positive difference in interest rates looks like this:

Currency swap = Trade amount * (Difference in interest rates – Broker’s commission) / 100) * Current price of a currency pair / Number of days in a year

With a negative difference:

Currency swap = Trade amount * (Difference in interest rates + Broker’s commission) / 100) * Current price of a currency pair / Number of days in a year

As you have already noticed, the swap amount already includes the broker’s commission for moving the position to the next day.

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