If you’re new to trading forex or other financial instruments, you may have heard the term “swap” being used in MetaTrader 4 and 5. In this post, we’ll explain what swap is, how it works, and how you can use this information to improve your trading performance.
What is Swap?
In simple terms, swap is the interest rate that is charged or paid for holding a trading position overnight. It is also known as an overnight or rollover fee. When you open a trading position, you are essentially borrowing one currency to buy another. The interest rate on the currency you are borrowing is usually higher or lower than the interest rate on the currency you are buying. This difference in interest rates is reflected in the swap rate.
If the interest rate on the currency you are buying is higher than the interest rate on the currency you are selling, then you will earn a positive swap. This means that you will receive a small amount of money in your trading account for holding the position overnight. If the interest rate on the currency you are buying is lower than the interest rate on the currency you are selling, then you will incur a negative swap. This means that you will have to pay a small amount of money from your trading account for holding the position overnight.
How to View Swap in MetaTrader 4 and 5?
To view the swap rate for a currency pair in MetaTrader 4 and 5, you can follow these steps:
- Open the Market Watch window by clicking on View > Market Watch in the main menu.
- Right-click on the currency pair you want to view and select “Symbols” from the context menu.
- In the “Symbols” window, click on the “Properties” tab.
- You should now see the swap long and swap short values listed for that currency pair.
The swap long value represents the interest rate you will earn for holding a long (buy) position overnight, while the swap short value represents the interest rate you will pay for holding a short (sell) position overnight.
It’s worth noting that the swap rate can vary depending on the broker you are using and the currency pair being traded. Some brokers may also adjust their swap rates to reflect market conditions or other factors.
How to Use Swap to Your Advantage
Knowing the swap rate for the currency pairs you are trading can be useful in several ways. For example, you may choose to hold a position overnight if the potential profit from the trade exceeds the cost of the negative swap. Alternatively, you may decide to close a position before the end of the trading day to avoid paying a high negative swap.
Some traders may also use swap rates to inform their trading strategies. For example, they may look for currency pairs with high positive swaps and hold these positions over a longer period to maximize their returns.
Suppose you have a long position in the AUD/USD currency pair with a trading volume of 1 lot (100,000 units of the base currency – Australian dollar). The current interest rate on the Australian dollar is 0.5%, while the interest rate on the US dollar is 0.25%. The swap long rate for this currency pair is +3.3 pips.
In this scenario, you will earn a positive swap of $3.30 per day for holding the position overnight, as you are borrowing the US dollar and buying the Australian dollar, which has a higher interest rate. If you keep this position open for one week, you will earn a total of $23.10 in positive swap ($3.30 x 7 days).
Now suppose you have a short position in the EUR/GBP currency pair with a trading volume of 1 lot. The current interest rate on the euro is -0.5%, while the interest rate on the British pound is 0.1%. The swap short rate for this currency pair is -9.8 pips.
In this scenario, you will incur a negative swap of £9.80 per day for holding the position overnight, as you are borrowing the British pound and selling the euro, which has a lower interest rate. If you keep this position open for one week, you will have to pay a total of £68.60 in negative swap (£9.80 x 7 days).
It’s worth noting that swap rates can change over time, so a position that was earning a positive swap one day may earn a negative swap the next day. It’s important to stay informed about current swap rates for the currency pairs you are trading to make informed trading decisions.
In conclusion, swap is an important concept to understand in forex trading, as it can affect your trading profitability. By knowing how to view the swap rate in MetaTrader 4 and 5, and how to use this information to your advantage, you can make more informed trading decisions and improve your overall trading performance.