“Swap Free” Meaning in Forex: Explained
Anyone who’s interested to do forex trading is welcome to do so. Forex isn’t exclusive to a country or profession. Anyone who has an account with a legitimate forex broker like Fair Forex can become a retail trader and start trading anytime.
The forex market doesn’t have restrictions in this regard. On the flip side, some groups of people may be restricted from doing forex trading because of their religious beliefs.
Islamic Forex Trading
Muslim traders are a prime example of this. Islamic law states that engaging in a contract or business that includes charging and receiving riba or interest is strictly forbidden. It does, however, allow Muslims to engage in currency exchange. Many believe this is because of a teaching that the Prophet Muhammed reportedly said.
To give traders the ability to trade regardless of their faith, swap free accounts were created. Debates on whether these accounts, and by extension Forex trading, are truly halal still continue to this day. The decision ultimately depends on each trader; and for Muslim traders, if they think that a swap free account sufficiently addresses the restriction against riba.
What Are Swap Free Accounts?
As the name suggests, these are trading accounts that do not generate swaps. In forex, a “swap” is a commission or rollover interest that a broker charges when a trader decides to keep their position open overnight.
Swap free trading accounts do not generate swap interest, which makes them ideal for Muslim traders. This also explains why swap free accounts are also called Islamic forex accounts. They are, after all, the only types of accounts that are swap-free.
Swap free accounts are usually offered to Muslim traders, but brokers can also provide them to non-Muslims.
How to Calculate the Swap
It is standard practice in forex trading for online brokers to charge or pay traders the differential interest of the currency pair they’re trading if they maintain their positions overnight. When the forex market closes at the end of a trading day, traders have the option to carry over their position to the next trading day. This generates interest, which the broker will either deduct (charge) or add (pay) to a client’s account.
The interest comes from the exchange rate fluctuations that can take place overnight while the market is still closed.
Here’s what usually happens when a position is left overnight: if the interest rate of the currency you’re buying is higher than the currency you’re selling, you will earn interest from your broker. If it is the other way around — the currency you’re selling is higher than the one you’re buying — the differential interest will be deducted from your trading account.
The interest can be positive or negative depending on the difference between the interest rates of the currency pair. Here’s an example:
Suppose you’re buying euros and selling US dollars. Assuming that the interest rate of the euro is 4.25% and the dollar’s is 3.5%, you’ll get a differential interest of 0.75%. The differential interest minus the broker’s commission multiplied by the lot price, then divided by the number of days in the year (365) is the rollover amount that will be deducted or added to your account. The amount can be as little as less than ten dollars or as much as hundreds of dollars a night. It can also either be negative or positive.
How Can Swap Free Accounts Earn?
Islamic accounts generate revenue purely through foreign exchange. This also eliminates another restriction of the Sharia Law for Muslims, which is gambling. They might miss out on the opportunity to earn a from a swap, but there’s no guarantee that the overnight commission will be added to your account and not deducted either.
If you have more questions about swap free accounts and would like to find out whether they are ideal for you, our contact lines are open. Get in touch with Fair Forex today.