Knowledge is power only if man knows what facts not to bother with – Robert Staughton Lynd
Electronic trading, particularly foreign exchange trading, continues to grow in popularity. According to the BIS Triennial Central Bank Survey, the most comprehensive source of information on the size and structure of global foreign exchange (FX) and over-the-counter (OTC) derivatives markets, FX trading reached a gargantuan $6.6 trillion per day in April 2019.
Newer traders, either on a small live account or a demo account, often start their trading journey craving a faultless trading strategy, a thirst fuelled via trading forums. Equally as important to consider, though, are factors such as risk-management systems, money-management plans, and trading costs/interests, specifically MT4 swap charges and rollover.
The FX market governs exchange rates, organised by way of currency pairs via a Bid/Ask quote.
The EUR/USD, for example, the most heavily traded currency pair, operates through a base currency, the euro, and quote currency, the US dollar. Like all currency pairs, the base currency always represents 1 unit, while the quote currency specifies the value of the base currency. For example, EUR/USD trading at $1.2500 indicates 1 euro is valued at 1.25 USD.
What’s important to recognise is the arrangement of a currency pair consists of two currencies and, by extension, two countries. Consequently, traders must also consider the country’s respective interest rates.
Short-term interest rates (or base rates) are set by a country’s central bank, such as the US Federal Reserve or the Bank of England. MT4 swaps are calculated based on the overnight lending rates in the interbank market and are provided to Forex brokers on a daily basis from liquidity providers. As a trader, you essentially trade the interest rate differential between the two overnight interest rates.
In the Forex market, swap is the interest paid at the time of rollover. Holding open positions after 5 pm (New York EST) incurs interest, either in the shape of a debit or credit, subject to a country’s overnight interest rate.
Rollover refers to the extension of an active position’s settlement date, effectively rolling to the next trading day (Tomorrow Next –Tom-Next) in order to sidestep delivery of the underlier. Usually, a credit is earned if the long currency’s interest rate is higher than the short currency. Likewise, the account may be debited if the interest rate of the short currency is higher than that of the long currency.
Swaps are not a concern for day trading or scalping the FX market, as positions should be settled before 5 pm EST. Trading Forex longer term, however, the swap rates can become an issue and should be factored into the trading decisions.
Calculating the swap rate is often tricky for many who trade Forex, and most, understandably, resort to online calculators. While the online calculation is fast and convenient, understanding the dynamics behind the calculation is time well spent.
MT4 swap rates can be accessed through the Market Watch tab (Ctrl+M). Right-click the financial instrument of interest (EUR/CAD in this case) and click Specification, as illustrated in figure 1.A.
Following this, scroll down and locate the Swap Long and Swap Short values, as in figure 1.B.
As you can see, the Swap Long rate for EUR/CAD is -5.43 MT4 points and the Swap Short rate is 0.61 MT4 points.
As an example, let’s assume an account is denominated in GBP, our base currency. To convert MT4 swap points to an equivalent monetary value, trading 1 standard lot size, we divide the swap points by the GBP/CAD exchange rate, which, as of current price, trades at 1.7315 (Ask).
Swap Long = -5.43/1.7315 (3.13 GBP will be debited to your trading account if trading EUR/CAD long)
Swap Short = 0.61/1.7315 (0.35 GBP will be credited to your trading account if trading EUR/CAD short)
To further clarify our understanding, again trading 1 standard lot, let’s look at another currency pair, the EUR/USD, which currently trades at 1.1836 (Ask). The MT4 swap rate for a long position is -3.93 while for a short position we have a value of 0.73 (see figure 1.C).
Using the same formula, only this time trading an account denominated in euros (the same as the currency pair’s base currency), we can calculate the swap values as follows:
Swap Long = -3.93/1.1836 (3.32 EUR Debit if trading EUR/USD long)
Swap Short = 0.73/1.1836 (0.61 EUR Credit if trading EUR/USD short)
The same formula applies to all currencies, such as the Euro (EUR), New Zealand dollar (NZD), Swiss franc (CHF), United States dollar (USD) and Japanese yen (JPY – 3 decimal places).
Holding a position overnight on a Wednesday incurs debits/credits 3 x the normal amount: triple swap. This accounts for the settlement of trades over the weekend as swap rates are not charged during this period.
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