What is Swap Point (Interest Rate) in the Forex market? Table of Contents
Learn about Swap Points in Forex
Learn about Swap points, the attraction unique to FX.
In this article, the features of swap point operation and the introduction of high-risk currencies are explained in an easy-to-understand manner even for beginners.
Note that due to the recent global situation, the policy interest rates of each country are fluctuating rapidly.
Please note that the policy interest rates and swap points introduced in the article are those at the time of article creation.
In the future, we will try to update the article contents as much as possible by looking at the situation.
At this time, please check the latest data on the official website of your FX company.
What is Swap Point?
In addition to aiming for profit from exchange rate fluctuations, FX can also make profits by “buying foreign currency and holding it”.
That is the swap point.
Swap points are “differences in policy interest rates between two countries” that occur when you trade in FX.
Each currency has a policy interest rate set by each country.
Turkey is famous as a country with a high policy rate.
In the case of Turkish currency Lira (TRY), the rate is 8.25% per year (as of July 2020).
If you trade in a currency like Turkish lira and sell a currency like EUR and JPY, you will receive the difference in policy interest rates between the two countries for as long as you keep the currency.
This is called a swap point.
Swap points are granted every day by holding the currency when trading with the above policy interest rate difference.
Swap Points are different by currency pairs
Since the policy interest rates of each country are different, the amount of swap points also differs depending on which currency pair is bought and sold.
For example, Japan’s policy interest rate is -0.10%, and Euro’s policy interest rate is 0.0%
Most countries trading in FX have higher policy rates (there are almost no countries with lower policy rates than Japan and Europe), so if you sell JPY and EUR and buy foreign currency, you can get swap points.
The Turkish lira is famous as a high interest rate currency.
In addition, the Mexican peso and South African rand are also currencies with high policy rates.
Forex positions that do not receive Swap Points
Even if you are aiming for profits from swap points, the swap points themselves could become negative.
There are cases that you do not receive swap points, which are mainly the following 3 situations.
- When you sell currencies with high policy interest rates and buy currencies with low policy interest rates.
- When you buy and sell Forex currency pairs on the same day.
- On Saturday, Sunday and public holiday, swap points are carried forward.
1. When you buy currencies with low policy interest rates
We mentioned that swap points will occur when you buy a high policy rate currency and sell a low policy rate currency, but if you buy a low policy rate currency and sell a high policy rate currency, you will not get a swap point.
For example, entering Turkish lira as “sell” instead of “buy” will result in a swap point loss.
If you leverage, swap loss will be larger, so you should be careful.
Since there is a policy interest rate in all currencies, there is a swap gain or a swap loss when the position is carried over to the next day.
Swap loss in long-term investment is a fixed loss, so you may want to minimize it.
2. When you buy and sell Forex currency pairs on the same day
If you close the position on the day, you will not get swap points.
Swap points are added at the timing of crossing (rollover) when New York market close while holding the position, so if you settle on the day, swap points will not occur.
Same-day settlement here refers to settlement from the time you hold your position until the time before the New York market closes.
Please note that even if you trade for swap points, you will not get swap points unless you have a position at rollover.
Also, since the swap points will be given to each FX company for a while, make sure you have enough time to make the payment.
This is a rollover, and swap points are generated by this transaction.
3. On Saturdays, Sundays and public holidays
The FX market is closed on weekends and holidays, so swap points do not occur on weekends and holidays.
However, swap points are properly generated for 365 days.
Forex trading is done by spot trading (a trading method in which the order is settled 2 business days after the contract is executed), so it has a mechanism that will generate swap points for 3 days including Saturday and Sunday on Thursday.
Trades executed on Thursday will be settled two business days later, which is Monday, as the end of the weekend is a holiday.
Since Saturdays and Sundays are settled by the settlement date, Thursday’s rollover will be carried over for 3 business days including Saturdays and Sundays, and swap points will be tripled as usual.
The system itself does not change even if there are holidays.
The settlement date will be two business days after the contract date, so if there are holidays in between, swap points will be added to the balance.
Trade FX to earn Swap Points
Generally speaking, FX has the image of aiming at foreign exchange gains, but many people are also trading for swap points.
There is interesting data, a survey on about 10,000 traders who have accounts at Foreign Exchange market.
One of the questions was about swap points, and 13.5% of the respondents answered that they “estimate swap points” when trading.
If you add 26.3% who answered that “I am also interested in foreign exchange gains, but I attach a great importance to swap points,” it means that nearly 40% of people are actually trading for swap points.
Earning swap points isn’t a rare method at all, but you have certain opportunities and methods to earn firm profits.
What to be careful when earning Swap Points
There are many traders who aim for swap points in FX, but if you do not pay attention to swap point management, you may lose swap points you have accumulated unexpectedly.
In particular, in emerging market currencies such as Turkish lira, there is a great possibility that the price of the currency itself will fall.
If it falls, it will break the principal instead of the swap point and will be forcibly lost, which may result in a large loss.
The Turkish shock in August 2018 is a typical example.
Due to foreign affairs over the detention of American pastors, the United States imposed economic sanctions on Turkey, causing the Turkish lira to be sold all at once and the price to plunge.
Due to the Turkish shock, Lira temporarily plunged 20% against the US dollar, which was a very painful event for the traders who had accumulated swap points on it.
Careful analysis is essential for emerging market currencies, where economic growth prospects are uncertain or financially insecure.
Swap points that can be operated simply by holding a position are certainly attractive.
However, rather than simply choosing “This currency has high swap points,” let’s start the operation after firmly grasping the risks unique to high interest rate currencies.
IronFX
Comment by Diletta
March 26, 2024
Awesome bonuses, good leverage. A few hiccups, but support rocks!