What are Forex Swaps in Metatrader/cTrader
Swap is the interest you earn or pay in points (1 point = 0.1pip) by going long one currency, and shorting another currency. (For eg. Long EUR short USD).
In Metatrader 4, the interest earned or paid per day is usually shown in points (1 point = 0.1pip), while in cTrader it is shown as pips.
IC Markets MT4 EURUSD swap points
You pay 0.417pips/4.17 points when you hold a long EURUSD position each day at 5pm New York Time.
IC Markets cTrader EURUSD swap points
You pay 0.42pips/4.2 points when you hold a long EURUSD position each day at 5pm New York Time.
What is 3 day swap?
In the above pictures, you might have noticed 3 day swap and wondered why is it on Wednesdays?
This is because your trades are rolled daily to prevent settlement and because the spot forex market has a two day settlement period. For eg. Trades executed on Monday are settled Wednesday, and trades executed Thursday are settled Monday. Thursday’s pricing incorporates the weekend interest as well because it settles on Monday. Therefore, triple swap is paid/received at the end of Wednesday’s trading session (5pm New York)/ at the start of Thursday’s trading session.
The rollover process is as follows. After holding a trade for 1 day, exit the trade and re-enter the same position for spot settlement (T+2). This is because forex trades are normally entered on T+2 (spot) basis (The price you see in MT4 and cTrader are all spot prices). After 1 day, the T+2 position will settle in T+1, hence we need to exit it, and re-enter the trade for spot (T+2).
T+1 is also not an absolute pricing from Today, but it is a relative pricing from T+2 (spot). So if spot is a Monday, then T+1 is a Friday, then T+1 reflect 3 days worth of discount instead of the usual 1 day.
Why does swap exist?
Because every currency has a cost to borrow, and pays an interest when you hold it, the resulting swap is approximately the difference between both countries interest rates.
- You can think of it as the difference between a dividend you receive when you long a stock, and the dividend you have to pay when you short a stock
|Interest rate (per year)|
If you are long EUR/USD, you hold Euros and borrow US Dollars, therefore you get paid -0.5% for holding Euros and pay 2% for borrowing US dollars. Your total cost is 2.5% per year.
If you purchase 1 lot (€100,000) and hold it for a year, you pay 0.025 * 100,000 = US$2,500 in interest.
Assuming 1.1000 is EUR/USD spot rate, per day, this translates to (0.025/360)*1.1 = 0.0000764 (0.764 pips per day)
360 days per year is the standard used in the FX markets instead of 365.
Swap points are to prevent arbitrage
Euro has a lower interest rate than USD. If I am forced to hold it 1 day earlier (i.e. T+1) instead of T+2, then I should receive compensation for receiving lower interest on Euro 1 day earlier and also not being able to earn 1 extra day of interest on the higher yielding USD, because I sold USD (in exchange for Euros) on T+1 instead of T+2.
Therefore, the EURUSD T+1 price is lower to compensate me for this ‘loss’, or else firstly no one would purchase EURUSD for T+1, and if they do, they could arbitrage it by selling EURUSD T+1 (meaning to borrow Euro and exchange it for USD 1 day earlier at T+2 rate), earn overnight interest rate on USD, then buy EUR sell USD T+2 (exchange USD for Euros at the same T+2 rate to repay the Euros you borrowed yesterday), effectively earning you an overnight interest rate on USD without coming up with capital or taking price risk.
Retail brokerages automatically roll your trades
In the Metatrader 4, cTrader and most retail brokers, your position is rolled automatically for you. If you are an institution, or a corporate, your bank will most likely not roll it for you because you actually want to receive Euros in your bank account when you purchase Euros and sell dollars in 2 days from the transaction date (T+2 settlement)
Why is there a need to roll your position? Because if you don’t, you will actually receive Euros and have to pay the equivalent dollars at the exchange rate you traded at, 2 days from your trade date (this is called T+2 settlement, also known as spot settlement). Most retail traders don’t want that. They just want to profit from the difference between their entry and exit price.
Swap comparison across different brokers
Perhaps you would like to earn or minimize interest paid on your trade while taking a directional bet. myfxbook offers a useful swap comparison tool across a lot of brokers to let you know which broker pays the most interest on your currency pair. Take note about the ‘type column’. Type 0 means the swap is in pips. I tend to ignore the other types because they are less commonly used.
What is my broker’s implied interest rate?
Let’s say now you’ve identified the above IC Markets EURUSD swap rate – swap long -0.42pips. How much interest do I pay a year if I hold this trade for 1 year?
(0.42pips * 360days) = 151.2 pips paid per year.
0.01512/1.1365 = 1.33% interest paid per year on your trade size, where 0.01512 is 151.2pips/10,000 and 1.1365 is the assumed spot price of EURUSD.
From this we can conclude that IC Markets and its liquidity providers take in total a 0.8% mark up on the interest from the interbank market. This is because as of today 14 July 2020, the ECB deposit interest rate is -0.5% and Fed interest rate is 0%, so in theory, you should be paying 0.5% to hold Euros overnight. However, in reality paying 0.5% is not possible unless one is a bank in the European Union. Also, I believe IC Markets does not get the full mark up of 0.8% as there should be multiple layers between themselves and the bank, such as various liquidity providers or prime brokers, and each layer would charge its own spread.
This tutorial is not set in stone, but will evolve as you ask more questions about swap below. I hope this guide has helped you gain a deeper understanding of the FX Markets!
If you are looking for an Australian regulated broker with good swap point rates, IC Markets and Global Prime are one of the better ones.
We are also having a commission discount offer with IC Markets and Global Prime. Receive up to a 21.5% commission discount on MT4, MT5 or cTrader platform (MT4 for Global Prime) when you open an account with us!