Understanding SWAP in Forex Trading Terms
SWAP Is – For forex traders or those of you who are learning to trade, you may have heard the term SWAP or SWAP interest before. Actually, SWAP itself is not the most important determining factor of one's trading success as is analysis. But if a trader understands the meaning of SWAP and can take advantage of it, the rollover interest can bring long-term benefits. So what exactly is SWAP?
SWAP is the value of the difference in the reference interest of each currency traded on the forex market. This interest will be earned by traders in transactions that are open until past midnight (stay trading positions). But please note that these SWAP payments are not always positive but can also be a burden in the trading that you do.
Understanding and How to Calculate SWAP in Forex
The main concept of SWAP is to calculate the difference from the interest you pay for the foreign currency sold and the interest you get from the currency you buy. Because forex trading is always done using paired currencies, inevitably the difference between the interest rates of the two must still be calculated.
For example, you make a 'buy' order for one currency pair, for example USD/JPY. This means you buy USD and sell JPY. The same thing applies if you make a sell order by selling JPY and buying USD.
Suppose that at one time, there is an increase in interest rates from the Fed by 2.5% while the Bank of Japan sets interest rates at 2%. So if you open a buy position for the USD/JPY pair and then hold it until past midnight (based on broker server time), then the SWAP value is 2.5% -2% = 0.5%. Because the value is positive, it means you will get 0.5% interest.
Conversely, if you open a 'sell' order for the same two currencies and leave it until past midnight, the SWAP rate will be 2%-2.5%=-0.5%. Because the value is negative, you will pay a SWAP fee of 0.5% for each lot. This fee will be automatically deducted from your trading income.
For traders who understand well how SWAP works, they can continuously benefit from positive SWAPs. Trading using SWAP is known as the carry trade. But like most other trading methods, there is no way of trading that is absolutely perfect and 100% profitable. So if you still want to use this method, it should be noted that there will still be risks in trading.
Understanding and How to Do SWAP in Cryptocurrency Exchanges
Apart from foreign currency exchange, the term SWAP is also known in the cryptocurrency world. Reporting from Coinmarketcap, there are two meanings of SWAP in cryptocurrency, namely:
Direct exchange of a number of cryptocurrency tokens with other tokens is carried out between users facilitated by special exchange services
Migration of cryptocurrency tokens built on one blockchain platform to a different blockchain platform.
In the first sense, SWAP cryptocurrency is a service provided by most exchange platforms in the world and in Indonesia. The existence of a SWAP allows a cryptocurrency investor to buy and sell one asset he owns with another type of asset. For example, you want to SWAP Ethereum with Bitcoin. That is, you sell the Ethereum that you have and exchange it for Bitcoin.
However, due to limited liquidity, not all cryptocurrencies can be SWAPed directly. This often happens with tokens that are not very popular. So instead of doing a direct SWAP between the desired tokens, traders will usually first exchange their tokens into fiat currency or into other more popular cryptocurrencies, then exchange them again for the desired token.
For example, you have token A which is not that big in terms of value and popularity. If you want to exchange this token for Bitcoin, it might be difficult because the popularity of the two is different. Then how to overcome it? First sell the A token that you have, after you get the money you can buy the Bitcoin you want.
SWAP is one of the many trading terms and methods used in the world. Before you choose to use this technique for forex or cryptocurrency exchanges, make sure you understand the risks well, okay!