Posts Tagged ‘swap-free’

Swap-free accounts and carry trade strategy

Monday, July 1st, 2013
Swap-free accounts and carry trade strategy
The currency market gives a fair shot to earn as every trader is free to choose his niche and specialization. However, by mixing completely different strategies, it is possible to get an equally stable income. For instance, while some opt for medium- or long-term trading on swap-free accounts, others prefer a carry trade strategy.
Swap-free accounts ensure working on Forex without swaps (or commissions, in other words) which are either charged or credited by a broker for holding overnight positions. InstaForex, for example, renders this service for free. Swap-free accounts will perfectly suit the needs of long-term traders who choose the most volatile currency pairs with a negative swap.
Consequently, the traders can have their positions open for a long time, and they do not pay for it. But swap-free accounts are not credited with the annual interest on free margin (InstaForex guarantees 13% annual interest to active accounts).
The carry trade strategy implies making profit on the positive carry between the interest rates of the countries whose currencies you trade. The bigger the difference between the rates is, the bigger swap you will get for the position’s prolongation. AUD/JPY, NZD/JPY, and GBP/CHF are the most popular carry trade pairs. Besides, such exotic pairs as AUD/DKK and USD/MXN are also used in carry trading. A trader can calculate the returns of the carry trade pairs individually comparing the interest rates that are publicly available.
Substantial profit can be derived from the position’s prolongation for a week or more. Thus, the carry trade strategy is frequently employed by long-term traders. Commonly, positions are opened on Wednesday and carried over to Thursday – the swap is trebled for such an operation. Higher volatility and interest rate fluctuations are the main risks that can trigger a trend change and have a profound impact on the swap amount.
Therefore, it is up to you whether to enjoy swap-free trading or benefit from carry trade operations. By the way, it is possible to combine both strategies using different instruments.

The currency market gives a fair shot to earn as every trader is free to choose his niche and specialization. However, by mixing completely different strategies, it is possible to get an equally stable income. For instance, while some opt for medium- or long-term trading on swap-free accounts, others prefer a carry trade strategy.

Swap-free accounts ensure working on Forex without swaps (or commissions, in other words) which are either charged or credited by a broker for holding overnight positions. InstaForex, for example, renders this service for free. Swap-free accounts will perfectly suit the needs of long-term traders who choose the most volatile currency pairs with a negative swap.

Consequently, the traders can have their positions open for a long time, and they do not pay for it. But swap-free accounts are not credited with the annual interest on free margin (InstaForex guarantees 13% annual interest to active accounts).

The carry trade strategy implies making profit on the positive carry between the interest rates of the countries whose currencies you trade. The bigger the difference between the rates is, the bigger swap you will get for the position’s prolongation. AUD/JPY, NZD/JPY, and GBP/CHF are the most popular carry trade pairs. Besides, such exotic pairs as AUD/DKK and USD/MXN are also used in carry trading. A trader can calculate the returns of the carry trade pairs individually comparing the interest rates that are publicly available.

Substantial profit can be derived from the position’s prolongation for a week or more. Thus, the carry trade strategy is frequently employed by long-term traders. Commonly, positions are opened on Wednesday and carried over to Thursday – the swap is trebled for such an operation. Higher volatility and interest rate fluctuations are the main risks that can trigger a trend change and have a profound impact on the swap amount.

Therefore, it is up to you whether to enjoy swap-free trading or benefit from carry trade operations. By the way, it is possible to combine both strategies using different instruments.

Do Swaps Make Sense?

Tuesday, May 8th, 2012

The easiest definition of swap term is assets retained or added to a trading account for prolongation (carry over) of a position to the next day or a fee for carrying a position over midnight.

moneySwaps can be either positive or negative. Interest for a position carry over in a currency market is paid or deducted for every open trade at 17.00 EST (Eastern Standard Time) for every trading day. Trades opened before 17.00 EST and retained after this time are considered as carried over till next day and are charged or credited with an interest depending on a trading position opened by trader.

The currency of one country bought/sold by trader versus the one of another determines if it is going to be positive or negative swap. The swap rates are set by currency rates composing a currency pair. In case the loan rate exceeds the deposit one, the swap is written off from a trading account. Positive swap is credited when the active rate of bought currency is higher than the one of sold currency.

The target of Forex traders is to derive profit running speculative operations with currency contracts. Practically, a currency delivery does not take place. Working through a brokerage company, trader may apply to leverage and hold positions open for as long as he wants. In case a factual currency delivery is expected, it should have been accomplished within 2 days.

In most cases a position carrying over to the next day is implemented automatically by broker. It is required for prolongation of a current open position and avoiding a real accrual of purchased currency to a trading account. Swap combines with buying or selling of two contracts with different settlement dates on equal terms. If a position remains open by the end of the day, it will be closed and opened immediately, but with a small gap. During trade execution a currency purchased by trader is conditionally deposited into bank at interest, and the sold currency is taken as a loan at interest rate as well. For instance, you open a trade with USD/JPY pair, buying dollars for yens. In case at that time the interest rate in the USA is higher (for example, at 1%) than in Japan (0.3%), then you will have the difference between them (0.7%) accrued. If you would sell dollars buying yens, then you would have to pay the difference between the rates.

From Wednesday to Thursday a triple swap is added or deducted. Why? As trade calculations and currency delivery would have been completed on the second day (in our case it is Saturday), when world banks are closed, the settlement date shifts to Monday and the swap is calculated for 3 days.

Positive swaps allow trader to raise additional profit. Currencies with huge interest rate difference are actively applied in carry trade operations for gaining only due to rate fluctuations and swaps.

Some brokers provide their customers with swap-free accounts, if standard trading terms run counter to their religious convictions. On swap-free accounts (also called Islamic) any currency pair trades can be executed, but if they are carried over midnight, trader gets no profit or loss.

Added by Andrey Misyuk,
InstaForex Clients’ relationship manager