Understanding and How to Calculate SWAP in Forex

 If you are a forex trader or are learning to trade, you may have heard of SWAP or SWAP interest. While SWAP itself is not the most important factor for trading success, understanding its meaning and taking advantage of it can bring long-term benefits. So, what exactly is SWAP?

SWAP is the value of the difference in reference interest rates between each currency traded in the forex market. Traders earn this interest on positions that are open until past midnight, but please note that SWAP payments can also be a burden on your trading.

Understanding and How to Calculate SWAP in Forex

To calculate SWAP, you need to understand the main concept, which is the difference between the interest you pay for the foreign currency sold and the interest you receive from the currency you buy. As forex trading is always done using paired currencies, the difference between the interest rates of the two must still be calculated.

For example, if you make a 'buy' order for the USD/JPY pair, you buy USD and sell JPY. If there is an increase in interest rates from the Fed by 2.5% while the Bank of Japan sets interest rates at 2%, and you hold the position until past midnight, the SWAP value is 2.5% - 2% = 0.5%. This means you will receive 0.5% interest. Conversely, if you make a 'sell' order for the same two currencies and hold it until past midnight, the SWAP rate will be 2% - 2.5% = -0.5%, and you will pay a SWAP fee of 0.5% for each lot.

Understanding and How to Do SWAP in Cryptocurrency Exchanges:

For cryptocurrency exchanges, SWAP has two meanings: direct exchange of cryptocurrency tokens with other tokens and migration of tokens built on one blockchain platform to a different platform. In the first sense, SWAP allows investors to buy and sell one asset with another type of asset, but not all cryptocurrencies can be SWAPed directly due to limited liquidity. In this case, traders usually exchange their tokens into fiat currency or other popular cryptocurrencies before exchanging them for the desired token.

Before using SWAP as a trading technique for forex or cryptocurrency exchanges, make sure to understand the risks involved.