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Understanding Swaps & Rollover Period: A Comprehensive Guide for Traders
Understanding Swaps & Rollover Period: A Comprehensive Guide for Traders
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Introduction

In Forex trading, swap fees, or rollover fees can have a substantial impact on traders' profitability and risk management strategies. This article unpacks the concept of swap fees and how they might affect trading activities on Wednesdays specifically.


What are Swap Fees?

Swap fees are charges for holding a Forex position overnight, based on the interest rate differential between the traded currencies. These fees differ by asset and depend on central bank rates, liquidity, and market demand. Traders either pay or receive interest on overnight positions, dictated by their trade direction and the relevant interest rate differences. Market rollover takes place daily at 5pm EST.


Mechanics of Rollover:

  1. Interest Rate Differential: Each currency in a forex pair is associated with an interest rate set by its respective central bank. The rollover rate is determined by the difference between these interest rates.

  2. Currency Pairs: Rollover rates are specific to the currency pairs being traded. For each currency pair, the trader borrows one currency to buy another. The rollover rate accounts for the difference in interest rates between the two currencies.

  3. Long and Short Positions: When a trader holds a long (buy) position in a currency pair, they receive interest if the base currency has a higher interest rate than the quote currency. Conversely, if the base currency's interest rate is lower, the trader may need to pay interest. The opposite holds true for short (sell) positions.


Why Does Forex Rollover Exist?

Rollover rates exist primarily due to the 24/5 nature of the forex market. Unlike the stock market, where trading ceases at the end of each trading day, the forex market operates continuously. This constant trading flow requires a mechanism to account for interest rate adjustments during weekends and holidays when banks and financial institutions are closed.


Why are Wednesdays Special?

Wednesdays have a unique significance in the world of swap fees due to the structure of the forex market. A forex trading day starts and ends at 5:00 PM New York time (10:00 PM GMT). When a position is held open beyond this time, the trade is considered to be carried over to the next day, and swap fees are applied.

On Wednesdays, swap fees are typically charged at triple the usual rate. The reason behind this stems from the fact that the forex market operates on a T+2 basis, meaning that trades executed on Monday are settled on Wednesday. Since the settlement process involves actual currency exchange, the triple swap fee on Wednesday accounts for the interest rate differential for the extra two days.


Effect on Traders

For traders with short-term strategies or those who open and close positions within the same day (day traders), swap fees might not be a significant concern. However, for swing traders, long-term investors, or carry traders who rely on holding positions for extended periods, swap fees can eat into their potential profits.

Disadvantages and Risks for Traders:

  • Price Gaps: Various events like economic announcements, unexpected news etc. during closed markets can cause significant price gaps at reopening, leading to potential substantial losses. It is to be noted that the occurrence and intensity of these price fluctuations can vary from day to day as well and that your predetermined stop loss and take profit parameters will NOT be respected.

  • Control Limitations: Traders cannot manage or close positions during the rollover period.

  • Volatility Increase: Market open and close times tend to have higher volatility due to lower liquidity. This increased volatility can lead to wider spreads, potentially affecting the execution of your trades when the market reopens.


Managing Swap Fees

Traders can employ various strategies to manage swap fees effectively:

  1. Timing: Being mindful of the rollover time and avoiding positions that extend beyond the rollover period can help minimize swap fees.

  2. Currency Pair Selection: Choose currency pairs wisely, considering their interest rate differentials and how they align with your trading strategy.

Where to View Swap Fees

cTrader

  1. Open the cTrader platform and log in to your account.

  2. On the left side of the platform, ensure you are on the "Trade" tab, which is the first icon from the top on the toolbar.

  3. Find the market symbol for which you want to view the swap rates. In your watchlist, you can scroll through or use the 'Symbol Search' if necessary.

  4. Once you have found your desired symbol, click on it to select. For instance, if you want to check the swap for EUR/USD, click on 'EUR/USD' from the list.

  5. With the symbol selected, look to the right-hand side panel where it says "Symbol Info". Scroll down to the section with swap information. You will see entries for "Swap (long)" and "Swap (short)" which represent the swap rates for holding long (buy) and short (sell) positions overnight.

  6. If you want to view more detailed information about the swap, including the time at which the swap is charged and the swap period, look for the entries labeled "Swap Time" and "Swap Period, hours" within the same section.

The image below is just for your reference on how to view swaps on the platform:

Actual swap fees may vary depending on market conditions and from broker to broker. Please check the specifications of the particular instrument before trading.

All active ThinkMarkets & Eightcap accounts will be transitioned to DXTrade by February 27th, 5PM EST. These customers should close their trades by 4 PM EST on February 26th, 2024. Failure to do so will result in trades being automatically closed or liquidated to facilitate a seamless transition to DXTrade.


Calculating Rollover Rates:

  • Rollover Rate: Swap Rate x Volume (Lots) x Number of Nights = Swap in base currency.

  • Swap Rate: Can be positive or negative based on interest rates and varies for long (buy) and short (sell) positions.

To understand better, let's use an example with the AUD/USD pair:

  • Example Calculation: For a long position with a swap rate of -4.38 and 2 lots held for 5 nights, the swap fee would be -4.38 x 2 x 5, totaling -43.8 AUD. This fee is negative, meaning it's a charge, not a credit.

  • Conversion: The AUD/USD pair is charged in AUD. The amount would be then converted into the currency of your account.


Swap Free Accounts

Please see our Help Article on Swap Free Accounts here.

If you have any further questions relating to Swap Fees, please do not hesitate to reach out to our Trader Success Team through our dedicated Live Chat.

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