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What is swap on forex?

# Forex for dummies

Most traders are looking for the most convenient positions to enter and exit the transaction. Often, the optimal moment to close the deal has to wait, and it can occur outside the current day. Therefore, the transaction has to be postponed to the next trading day.

What are the consequences for a trader if a trade operation is postponed to the next day or several trading days continue?

In this case, the fact of using the funds provided to you by the broker in margin trading arises. The provision of funds arises because the standard contract that is operated on the Forex market is usually 100 thousand units in the currency of the contract. This contract is 1 lot. At the same time, the trader invests only a small part of his own funds under this contract, and the remaining funds are provided by the broker on credit to complete the transaction. The size of the loan depends on the leverage provided by the broker to the trader.

Swap concept

Swap or swap in the terminology of the Forex market means the obligation to purchase one currency for another with subsequent redemption. In fact, you buy one currency for another, which is on your deposit. Typically, this is the national currency or US dollars. When closing a transaction to an account, you receive exactly the currency in which your trading account is open, that is, you perform a buyback operation. It is not necessary to know in detail the mechanism of currency exchange in the foreign exchange market, but in general terms, why a broker deducts money from your account for transferring an open position the next day is worth it. Actually, it does not always write off. Withdrawal of funds occurs when the swap for the selected instrument and the transaction is negative. If the swap for the instrument and operation is positive, then the broker, on the contrary, will deposit money into your trading account.

How is a swap calculated?

Since a trader is trading an instrument in which there are two currencies in fact at the same time, a swap is defined as the difference between the interest rates for a loan in one and the other currency. For example, when buying a pair of EUR / USD, we actually buy euros for dollars (the first part of the EUR pair acts as a commodity, that is, it always says that we are buying, and the second part of the pair – USD – tells what currency we are buying this “ product”). The euro loan rate (ECB rate) is 0%, and the US dollar rate is 1.5%.

Accordingly, when buying a pair, we get a negative swap: 0% -1.5% = -1.5%. This means that when buying a standard contract when transferring an open position for 1 day, he must pay 1.5% per annum per 1 day and the volume of the transaction.

Accordingly, when selling a pair, on the contrary, it is credited to the account 1.5% per annum per 1 day and the volume of the transaction.

Read more in the following article: How to understand how much will be debited when transferring an open position for 1 day

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To conclude a framework agreement, the client is obliged to confirm that he is familiar with the following risks associated with the conclusion, execution and termination of obligations under the framework and individual agreements:

1. The risk of loss to an individual as a result of changes in foreign exchange rates (currency risk).

2. The risk of loss to an individual as a result of non-performance, untimely performance or incomplete performance by the Forex dealer and (or) the bank in which the Forex dealer account is opened, financial obligations to such an individual in accordance with the terms of the Agreement and Separate Agreements (credit risk )

3. The risk of loss to an individual as a result of a violation of applicable law and (or) internal documents of a Forex dealer by employees of a Forex dealer, a malfunction (failure) of software and hardware of a Forex dealer and (or) individual, a mismatch of software and hardware of a forex dealer to the nature and volume of transactions it conducts, transactions by a third party on behalf of an individual as a result of receipt by such a person randomly or as a result of his deliberate actions of unauthorized access to the possibility of making such transactions on behalf of an individual, carrying out operations by an individual that are not in accordance with his intentions, for reasons related to insufficient experience of working with this individual with software and hardware of a forex dealer and (or) making it random actions, as well as the result of external events (operational risk).

Contracts or financial instruments proposed for conclusion are highly risky and may lead to the loss of the deposited funds in full. Before making transactions, you should familiarize yourself with the risks associated with them.

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