Do you want to know what the swap in trading means?
I’ll tell you, along with an anecdote.
In addition, I tell you that this is one of the most underrated but most important concepts to succeed in your career as an operator.
I am sure that most new traders or those who have been trading for a short time pay little attention to this concept.
Most people worry about the standard commissions or the “absence of these” (when the broker put them in the spread).
But few are those who think about the swap rate.
This is something totally understandable in those who do day trading, but it is not in those who want to do a longer operation.
Few worry about this concept and then scares come later.
That happened to me many years ago in my beginnings as a speculator.
I was trading CFDs of commodities in a well-known broker and I was simply worried about getting good swing-type trades. Some of which lasted a few weeks.
My surprise came when I saw that my results were worse than expected.
What was happening?
Well, when I looked at the results of some operations, I realized that the cost of financing to maintain my operation for several days was 50% annual.
A lot, of course.
I am willing to accept rates of up to 10% according to which instruments, since it depends on volatility, there will be instruments that move so much that a high swap rate is not very important.
Now, things change when for reasons we do not know they put us types of 15, 20 or even 50%!
What is the Swap in trading?
Before going on we have to clarify that the swap rate is the financing cost that we will have to bear when operating in certain markets, normally leveraged, in which depending on the instrument and the broker we will have to pay a known rate in advance.
And this is very important: we have to look at the conditions of the broker with which we operate so that they are clear, and one of them and of the most important is the cost of financing or swap.
We will take some surprises of how expensive some are and how cheap others are.
There are some who even pay us positive swaps under certain conditions.
Needless to say, if you are an intraday operator then this variable will not be a problem at all, having to concentrate on the spread, commissions, operating conditions and, of course, your trading.
The markets that will be most affected by this cost are those of currencies and cfds, including stocks, commodities and any instrument offered in that category.
If we are going to operate with a leveraged broker without being futures – in which we will have to consider the rollover instead of the swaps – we will have to take these types into account.
And the differences from broker to broker are usually considerable.
As I said before, a few days ago I looked at the regulation of types of the previous weekend in a couple of instruments, among which was a position in soybean cfds.
My surprise was huge when I saw that the financing amount was too expensive, and I did not hesitate to consult the swap rates of the broker in question.
The surprise was when I saw on their homepage, that soybean types were at 50% per year.
Fortunately, the soybean market had fallen more than 20% in a few days and I was short on it, so in the end I did not lose money, although the fact that the swap guy was at those levels made me leave immediately, at a time when under normal conditions I would have remained bearish until the market told me otherwise; following the trend and moving my stop (trailing) saving a good part of my profits.
But, with what happened, I preferred not to maintain that position any longer and to satisfy it.
When you are paying 50% interest to maintain your position, this can be an almost unaffordable burden for your account.
The broker almost forces you to close the transaction on the same day or as soon as possible.
For example, at 50% interest, imagine that I have a 1,000 dollar account and have purchased soy CFDs for 5,000.
In one year I would pay $ 2,500 to keep that contract open.
In order not to lose money I would have to wait for the market to move 50% in my favor.
In only one month of open position I would be paying 10% of my account, about 100 dollars.
This is unaffordable for a trader.
The broker in which this happened to me was considered one of the best CFD brokers in the world.
Fortunately, the rest of the raw materials offered, such as gold, silver, corn, natural gas and oil offer fairly decent rates, ranging from 2% to 9% in the last, which allows operating in the medium term with comfort and also with some pretty good spreads too.
The problem is that I realized that they changed those swap costs very frequently and without warning.
One week the swap was at 8% and the next at 23.
Complicated like that.
Swap in Forex
Here, a lot of attention is paid to this important concept, especially in many veteran traders who seek and seek to benefit from the different types of swap between different currencies in the world.
In case you do not know, each international currency has an associated interest rate that is determined by the interest policy of the respective national banks.
That is, if the Bank of England has a rate of 5% and the Bank of Japan a rate of 0.5%, then the swap rates applied by the brokers will be related to them.
In this way, the currency with the highest interest rate will tend to pay interest to those who own it and the one with the least interest will cost.
That is to say, in Forex when buying a currency we will receive the interest rate of the same one and we will pay the one of the currency in which we are short (the currency against which we bet) and vice versa.
Let’s see an example with the data that I have put.
We are in broker A and the interest rates are: 5% for the pound and 0.5% for the Japanese yen.
The broker will not apply those interest rates in its swap cost management but will apply a “commission” in its favour.
That is, under normal conditions the trader who buys GBPJPY should receive something like 4.5% annual interest.
And the one that sells the GBPJPY (gets long in the yen), should pay 4.5% annual interest.
In the reality of the Forex broker will discount a fee and will end up paying in another way:
- The one who buys the GBPJPY will receive 3% per year
- Whoever sells the GBPJPY will pay 6% per year
That is to say, that with the broker we will always have to pay more than what we will be charged if we are on the other side of the trade.
Here it is important to look at the difference between broker and broker because they can be significant and this is really important for those who want to operate with these types of strategies.
Forex Strategy with Swap
This type of strategy has always been widely used in Forex trading, especially in the past, when interest rates among major currencies had important differences.
Who does not remember the famous carry trade with the Japanese yen?
This strategy was used massively for many years because the Central Bank of Japan rates were close to 0% for many years while those of the other major currencies were at 4, 5 or 6%.
That meant that only buying pounds, Australian dollars, euros or dollars traders could get good annual profits with the positive swap.
If we add to this the fact that many years these currencies had to rise with respect to the yen, we have a case of great profits in the Forex market.
Of course, those great benefits of Carry Trade could not last forever and many of those who used that strategy were massacred when the yen rose dramatically with respect to the currencies with which the traders were financing themselves.
However, there is another even more notorious example of “carry trade” or Forex swaps strategy.
This was the case of the Swiss franc (black Thursday of the forex) since 2011 when the central bank of that country established a policy of parity with the euro and pledged not that the price would not fall below a certain level.
As the interest rate in the euro area was higher than the Swiss franc, it was the case that there was a very clear carry trade and many traders set out to “take advantage” of the situation.
For example, in an entry in the website “earnforex”, the author commented that after three years of doing carry trade he decided to leave it because his broker changed the type of remuneration and it was not worth doing.
Actually the broker did him a great favour, because if he had stayed in the trade he would have taken a surprise.
Imagine that to buy the EURCHF you had a carry trade of 0.25 pips a day in your favour.
If your operation kept it open for three years and assuming you would not lose money by exchange rate, you could have obtained the order of 270 pips.
It may not seem like much, but considering that this type of carry trade was considered as almost certain, what many people did was leverage to the maximum.
That is, imagine a trader with 10,000 euros.
Leveraged 100 to 1 he was able to buy 1,000,000 of EURCHF.
Winning those 270 pips for 3 years could have taken about 27,000 euros of gross profit, which is not bad for such a “passive” trade.
The problem came later because many of these traders did not sell on time and thought that this carry trade would last much longer.
The fact is that it was not like that and it ended with the fateful Black Thursday of the Forex, in which the Swiss Central Bank eliminated the intervention and suddenly the franc appreciated by around 20% with the rest of world currencies.
Imagine that you were the trader with a position of 1 million EURCHF.
In minutes you would have a loss of approximately 200,000 euros.
A disaster for your 10,000 account, do not you think?
Well, this is just an example but I think it serves well to see what can happen in this type of trade.
You have to be very careful when trying these strategies looking for the positive swap in Forex.
If you want to use a swap type calculator, many brokers provide them, such as Onada or XM.
Swap in CFDs
It is not only in the Forex where we have to pay these Swap or financing costs.
Also when we operate the CFDs of indices, stocks or commodities we will have to pay a financing to keep our positions open.
After all, it’s normal.
When we negotiate CFDs it is as if we are borrowing money.
If we have $ 5,000 loaned, it is normal that we pay an interest rate for them.
For example, here we see the finance charges for the DAX 30 in a CFD broker.
Whether we go long or short we will have to pay.
In the case of indexes are not usually excessive charges, however.
In this case of the DAX, for a contract of about 12,000 euros, we would have to pay 0.76 euros per day, which would give about 277 euros per year, just over 2% per year on the contract.
If you look at the picture, you see that the day of collection of the “triple swap” is on Wednesdays.
Other brokers have Fridays or another day.
Why do you choose those days?
Look, I’m going to tell you the truth.
The brokers realized that many people closed operations on Fridays and therefore could not charge the weekend swap.
To take advantage of that they made new rules starting to load the weekend swap during the week and for that they used convoluted excuses that do not matter to us.
The reality is that they want to charge more when they should not.
I leave the operations open over the weekend as well.
Although this is not for everyone, of course.
You have to know what you’re doing.
Swap in shares
When we operate in stock CFDs the thing changes and it is normal to see swap rates of 9 or 10%.
Although this is also nothing that should surprise us, given the much more volatile nature of shares.
For example, if we calculate the cost of financing many long-term financial options operations, we would see that what we are charged by market makers is of the order of 10%.
That is, in those options if we want to earn money when we buy we have to wait for our asset to rise or fall more than 10% at the end of the period, depending on the direction of our bet.
Of course 10% is significant, but for experienced traders who know how to choose the values, it is an acceptable figure.
As we saw in my old case of Oanda, there are also types of swap for raw materials.
Brokers without swap
There are many traders looking for brokers without swap and try to take advantage of something like that.
Those accounts “exist”, and they are the Islamic accounts.
But they exist with a nuance, and that is that they do not exist, since no broker will be able to lend money without charging interest.
I would miss more.
What they do with these Islamic accounts is to charge them a commission for weekly or monthly use.
So get out of your head trying to operate without these types of costs when you’re playing leveraged.
Simply look for the way to win despite the swap.
Well, if you’ve read this far, I hope you learned something useful.
Above all I hope that those who are committed to doing day trading realize that there is another way to operate.
A way in which we worry about this swap cost.
A cost that, as you see, is significant.
But much less than operating several times a day throughout the year, in which case the cost of operation becomes much more unbearable for the health of our account.
A veteran trader tells you.
Greetings and good trading.