Introduction

Forex Trading has gained significant traction in the last few years. But as it becomes more mainstream, it’s important to understand the ‘ins and outs’ of Forex Trading.

It’s not just enough to have a good trading plan to succeed in Forex Trading; it’s also important to know the fees involved in Forex Trading, as these can significantly eat away at your trading profits.

One of these fees in Forex is swap fees. But what exactly are swap fees, why do they exist, and what can you do to reduce – or eliminate paying swap fees altogether?

What are Forex Swap Fees?

Swap fees, also known as Forex rollover fees, are essentially fees charged (or earned) on positions held overnight.

Swap fees are calculated using the difference in the interest rates of the respective currencies and can be either positive or negative.

**Positive and Negative swap fees: You may earn a positive swap fee when the currency you buy (go long on) has a higher interest rate than the currency you sell (go short on).

Likewise, if the currency you buy (go long on) has a lower interest rate than the currency you sell (go short on), you may be liable to pay an overnight (swap) fee.

Conversely, if the currency you sell (go short on) has a higher interest rate than the currency you buy, you may be charged a swap fee.

However, it’s worth noting that not all brokers charge swap fees, and some of them may offer significantly reduced swap fees or run promotions where they waive them altogether.

Why do Forex Swap Fees Exist?

So, why exactly do swap fees exist? They exist because of differing interest rates of currencies.

Every currency has its own interest rate, which is determined by the central bank which issues that currency. For example:

United States – The Federal Reserve

United Kingdom – The Bank of England

Japan – Central Bank of Japan

Generally speaking, the higher the interest rate, the more foreign investors may be inclined to invest in the currency.

When you enter a Forex trade, you essentially borrow one currency to buy another one, and this borrowing incurs an interest charge.

The Forex trader then pays this ‘borrowing cost’ as a swap fee.

How to Avoid Swap Fees in Forex?

So, now that you understand what swap fees are and that they can eat away at your trading profits, what are some steps you can take to avoid Forex swap fees?

There are 2 ways to either avoid them or mitigate their impact:

1. Close positions before the end of the trading day

The most obvious way to avoid swap fees is to close all your positions before the rollover period, which is typically at 5 PM EST.

Of the 3 primary trading strategies, 2 of them can incur swap fees, while 1 of them won’t.

These are the 3 primary trading strategies and how they will be affected by swap fees:

Day Trading: This trading strategy avoids swap fees altogether, as trades are opened and closed on the same day.

Day traders never hold their positions overnight and typically hold them for a few minutes or several hours – depending on their trade – however, never overnight.

Swing Trading: This trading strategy has exposure to swap fees, as positions are usually held for several days to a couple of weeks at a time.

Swing traders try to capture more significant ‘swings’ in price, rather than day traders who aim for smaller intraday moves.

Holding positions overnight – particularly over several days or weeks carries significantly more risks. These include market gaps – and, of course, swap fees.

Position Trading: This is the most long-term trading strategy in Forex. Position traders have a long-term view when they enter their trades, sometimes holding them open for several months or even years at a time.

Position trading is the most exposed to swap fees, as swap fees are calculated every night a position is open.

Also, some brokers charge a triple swap fee for the upcoming weekend when the Forex Market is closed.

Therefore, swap fees are an especially important consideration for position traders in the Forex Market.

2. Strategically Choose the Right Currency Pairs

Another way to avoid swap fees – or make it work for you is to strategically choose currency pairs with positive swap rates.

For example, if you go long on a currency pair where the base currency has a higher interest rate, swap fees can work in your favor.

However, this is for more advanced traders, as it requires a good understanding of interest rate differences between currencies and how they might change over time.

The Role of Swap Fees in Forex Trading Strategies

Now that we understand what swap fees are and why they exist, how should you factor them into your trading strategy?

1. Close out Your Positions on the Same Day

If you want to avoid swap fees altogether or find it too confusing to wrap your head around, just close your trades out on the same day.

This is the easiest way to mitigate any impact swap fees could have on your trading.

2. Use Swap Fees to Your Advantage

if you understand swap fees, use them to work in your favor! As mentioned already, you can earn positive swap fees when you go long on a currency with a higher interest rate than one with a lower interest rate.

However, just be aware that things can change quickly in the Forex market, so be ready to adjust your positions and keep an eye on the news for anything that can cause a sudden shift in market dynamics!

Conclusion

Swap fees are not something to be afraid of, but they are something to be aware of. As discussed, swap fees can work in your favor, but you need to know how to leverage them to your advantage. However, if you’d prefer to avoid them altogether, just close your positions on the same day. Don’t let them stop you from starting your Forex journey!