The swap is a tax that is applied by the broker when the trader keeps the position open during the night. The swap can be active or passive, in other words it can bring losses or profits.
The presence of the swap complicates noticeably the activity of trading, especially in a perspective of money management, but it is an element that cannot be removed. The swap is a physiological component of some kinds of trading. The good news is that it can be used to one’s own advantage, therefore to make a profit.
What is the Swap
The swap, as mentioned, is a tax. In particular a tax that results from an operation. This takes place “during the night”, since the factors that affect it are a result of the activities conducted by the broker and banks overnight. The “nocturnal” nature of the Swap cause a kind of break among the traders. In summary, only those who keep a position open for many days in a row need to worry about the swap. Those who practise Day Trading or even Scalping simply are not subject to the effects of the swap, neither positive nor negative.
It is impossible to explain the swap without introducing the concept of overnight tax. In addition, the swap is the result of an arithmetic operation that involves the overnight taxes. The overnight tax is the tax that an intermediary applies towards another intermediary when lending money. The particularity of the overnight, as the name suggests, is that such loan occurs through a nocturnal deposit. In the specific case of trading, the intermediary who lends money is always the bank of reference (or banks) while the intermediary who benefits from the service is always the broker.
All brokers, regardless of their type (ECN or Market Maker) have to refer to the mechanism of the overnights in order to guarantee the necessary liquidity to the clients. From here comes the constant presence, and sometimes pervasive, of this kind of tax in some types of trading contexts.
The particular features of the Swap
The swap, and as a consequence the overnight, presents some particular features, especially in the version applied to trading. Here are the main peculiarities.
They only regard some asset classes. Swap and overnight only regard the asset classes that are characterised by extreme liquidity, and which cause exclusively exchanges of money; therefore, the Forex and the CFDs on the Forex. The other markets, such as the commodities, but also the shares or bonds are not subject to the dynamics of the swap. It is true that this represents a drawback for the Forex traders, but one that can be transformed into a resource. It is sufficient to master the mechanism of swap and overnight, and acquire some specific information.
They change from one asset to another. The matter of “asset class” is not the only one to deserve a certain level of attention. In fact, it is necessary to make a distinction also between the various assets.. in the case of the Forex, a distinction between the various currencies. In addition, the overnight taxes change from one currency to another, affecting this way also the “final” swap. It is a physiologic dynamic: after all the overnight is applied to a loan, and some currencies are more available and stable than others.
They change from one broker to another. It should be clear that there are some benchmarks and in some cases they are determining for the calculation of the overnight and the swap. Nevertheless, in practice, they are the result of the consultation among the institutions or the parties involved in the granting of money. Therefore, in the case of trading, the amount of the taxes depends on the agreement made between the broker and the bank. It is not a small detail: a broker who has managed to obtain good conditions from the bank will offer lower taxes. On the contrary, if the agreement is less beneficial, the taxes can be very high.
How to calculate the Swap
As we have already mentioned, the swap results from a very specific calculation, from a mathematical operation. The terms of this operation are the overnight taxes of the currencies that form the pair.
However, it is necessary to follow a main rule. When the currency is in long position, the trader receives credit, therefore the tax is active. When the currency is in short position, the trader receives a charge. Due to this mechanism, if managed well, the swap can produce further profit, and not a simple yet tiresome cost to sustain.
How to calculate the? In first place it is necessary to understand which overnight taxes the broker applies to the specific assets they intend to trade. The taxes, mind you, cover the whole solar year, therefore it is necessary to normalise “to one day”. After this, the percentage is calculated on the volume of trading forecasted, or already applied, for that specific trader. A practical example will further clarify the ideas.
Let us imagine a long position pound-yen of the value of 100,000 pounds, obviously kept open overnight. Let us also imagine that the broker sets a tax of 3.67% for the pound and a tax of 0.07% for the yen. At this point the first tax is subtracted from the second and everything is normalised to a day. The calculation is the following: (3.67 – 0.07)/365. The result is the swap. In this particular case, it is 0.009, which normalised in absolute numbers becomes 0.00009.
At this point, it is sufficient to calculate the percentage on the volume of trading. Therefore: 100,000 x 0.0009 = 9.
To be exact, 9 are the pounds that will be credited in the morning, as a result of the swap. It should be noticed that it is credit because it was a long position and the overnight of the pound is higher than that of the yen.
Tips to exploit the Swap
The matter of the swap and the overnight can be very complicated, especially if the trader does not want to just manage it but is interested in exploiting in first person to generate profit. Therefore, here are some tips to benefit from the swap.
Considering the swap only if not conducting Day Trading or Scalping. As thoroughly explained in the previous paragraphs, the swap is a “nocturnal” element, therefore it is active only if the positions are left open over night, therefore from one day to another. It is obvious: those who conduct Day Trading or even Scalping close all the positions by night. In these cases, worrying about the swap is completely useless because it will never be applied.
Not orientating your own activity of trading only based on the swap. The swap has an impact, but not excessively. It impacts enough to require a certain level of attention and to justify operations aimed at the purchase of more profits, but not so much to orientate the entire trading activity. The profit, at least the important one, is not determined by the swap, but by the actual trading.
Choosing a good broker. This is the most important tip. As mentioned, each broker proposes their overnights, and therefore causes a certain level of swap. In fact, all comes from the agreement made with the bank or banks of reference. Despite the benefits of a high overnight in a context of credit, it is advisable to opt for the low overnights. These are in fact, what reduces the risks and the negative impact of the swap on the trading activity.
Among the brokers that offer the lowest swaps, Key To Markets stands out. From this point of view, as many others, it proves to be super-competitive. One more reason to rely on KeyToMarkets, broker appreciated for the offer of assets (+1500), the beneficial economic conditions, an excellent support and training service.