With most Forex brokers when you leave a currency pair position open over the night you will get a swap or an interest payment for it. It can be positive (you actually gain money) or negative (you lose money). That payment is usually very small and the majority of the beginning traders just dont pay any attention to it, since their direct profit or loss from the trading is much greater than this rollover interest. But why do the brokers pay and take this overnight interest payment or swap? And why do some brokers promote
The origin of the overnight interest is the fact that in the retail Forex market the physical delivery of the currencies is absent. If you buy €100,000 with your leveraged $1,000 the broker will not transfer those €100,000 to your bank account. But you have paid $100,000 for those euros, even if you borrowed them from your broker. So, if the Forex broker does not deliver the currency to you they technically borrow it from you. In the
Lets look at this rate calculation. You buy a standard lot (100,000 units) of EUR/USD with your account being in the U.S. dollars with the leverage of 1:100. The current Fed rate is 0.25% and the current ECB rate is 1.5%:
- You use $1,000 as the margin.
- You borrow $100,000 from your Forex broker.
- You buy €100,000 with the borrowed money.
- You lend €100,000 to your broker (because it wont deliver the currency to you, anyway).
- You need to pay 0.25% yearly or 0.00068% daily for your borrowed $100,000.
- Your Forex broker needs to pay 1.5% yearly or 0.00411% daily for its €100,000 borrowed from you.
- In the end, the broker needs to pay the difference between €4.11 and $0.68 for each day that your position is open. Thats your positive swap or overnight interest.
What would happen if you did not buy that standard lot of EUR/USD but went short on it instead? Youd have to pay that difference to your broker.
The problem is that in reality brokers dont pay or take the exact amounts for the overnight interest. They minimize the swap if they pay it out and maximize if you do. That way they try to avoid the risks. But thats certainly not very fair.
Why do some of the brokers claim that they do not pay or take overnight interest? Because the interest is viewed inappropriate by one of the most popular religions in the world — Islam. Some Forex brokers offer
How can you gain advantage from the overnight interest? First, you can use it for carry trade. When you feel that the currency pair with the big positive interest rate difference is going to remain stable or move in your favor for a long period of time you can use the brokers leverage to receive some ridiculously high interest rate from the swaps only. Another way is to open an account with two brokers — one that offers