What are swap points?
“How can I make a profit using swap points?”
Do you have questions like these?
When starting out in FX trading, you may come across the term swap points and wonder what it means.
To aim for swap points in FX, it is important to understand how it works and the tricks of trading.
Therefore, in this article, we will explain in detail the following contents:
- Swap point basics
- How to check swap points
- Precautions and tips when aiming for swap points
If you can grasp the tips and points to be aware of when aiming for swap points, you will be able to broaden the scope of your FX trading and make it easier to aim for profits.
If you are thinking of starting FX trading, please refer to this article.
What are swap points?
Swap points are the interest rate differential that arises when buying and selling two currencies.
In FX, when you buy the currency of a country with a high interest rate and sell the currency of a country with a low interest rate, you receive the interest rate difference as swap points.
Swap points are generated simply by holding a position, so the appeal is that you can aim for profits without having to repeatedly buy and sell.
For example, if you buy currency A, which has an interest rate of 0.2%, and sell currency B, which has an interest rate of 12%, you will receive swap points worth 11.8% as long as you hold the position.
However, in reality, the interest rate difference does not directly become the swap point, and each FX broker sets the swap points for each currency pair.
When aiming for swap points, be sure to check the FX broker’s website to see how many swap points you can earn.
How swap points work
Swap points are determined based on each country’s policy interest rate, but the amount awarded varies depending on the FX broker.
Here we will explain in detail how swap points work.
Swap points are determined based on each country’s policy interest rate.
Swap points are determined based on each country’s policy interest rate.
Policy interest rates are interest rates that central banks adjust with the aim of stabilizing the economy and prices, and emerging countries such as Turkey and Mexico tend to have high policy interest rates.
Please note that interest rates fluctuate depending on the situation in each country, so if you are looking to make a profit through swap points, it is important to check interest rate trends.
For example, Russia’s interest rate was 12% as of August 2023, but was raised to 13% at the monetary policy meeting on September 15.
Swap points are awarded around the time the New York market closes.
The timing of when you receive swap points will vary depending on the FX broker, but they are generally awarded around 7pm Japan time (6pm during daylight saving time) when the New York market closes.
For this reason, with many FX brokers, you can earn swap points by holding your position until the New York market closes the following day.
Swap points for Saturday and Sunday are generally awarded all at once when the New York market closes on Wednesday (Thursday morning Japan time).
For example, even if you have a position remaining on Saturday and Sunday, if you settle it during trading hours on Wednesday, you will not be able to receive swap points for Saturday and Sunday.
Recommended currencies for swap points
The larger the interest rate difference between the currencies, the more swap points you will receive.
Therefore, to aim for more swap points, it is effective to choose a pair of a low-interest rate currency and a high-interest rate currency.
The three main high-interest rate currencies are:
- Turkish Lira (TRY)
- Mexican Peso (MXN)
- South African Rand (ZAR)
On the other hand, the four major currencies with the lowest interest rates are:
- US Dollar (USD)
- Euro (EUR)
- Japanese Yen (JPY)
- British Pound (GBP)
Points to note when trading FX with swap points
When aiming to make a profit with swap points, keep the following points in mind.
- Swap points fluctuate daily
- Negative swaps can occur
- There is a risk of incurring losses that exceed the swap points
- Settlement is required to receive swap points
We will explain each one in detail.
1.Swap points fluctuate daily
Swap points are not always constant and fluctuate daily due to the following factors:
- Changes in policy interest rates
- Changes in settings by FX brokers
Swap points fluctuate depending on the difference in policy interest rates set by each country.
If the policy interest rate changes, the swap points you can earn will also change, so it is important to check the news about interest rate trends in that country.
2.Negative swaps can occur
You may also incur losses due to swap points.
For example, if you sell a high-interest currency and buy a low-interest currency, you will have to pay the interest rate difference as a negative swap.
Be aware that the longer you hold, the greater the amount you will have to pay.
3.There is a risk of suffering losses that exceed the swap points
Even if you hold a currency pair that earns swap points, it does not necessarily mean that you will make a profit.
The economies of countries with high interest rate currencies tend to be unstable, and the value of the currency can fall significantly.
It is not recommended to trade based solely on swap points, as a sudden change in the market can result in large losses.
The chart below shows the USD/TRY (dollar Turkish lira) chart for 2021.
For example, suppose you have a position with the following conditions (assuming 1 lot is 100,000 units):
- Held a 1 lot short position at 7TRY on February 1, 2021
- Daily swap points earned are 2,000 yen
- Position still held as of February 2022
In this case, if you hold the position for a year, you will earn 730,000 yen (2,000 yen x 365 days) in swap points, but because USD/TRY has risen by more than 9 TRY, there will be times when your unrealized loss will exceed 900,000 yen.
If your margin is small, you will be subject to loss-cutting as the unrealized loss grows, and you will suffer large losses.
To limit losses, refrain from trading lots that are incompatible with your margin.
4.Settlement is required to receive swap points
Swap points are added daily, but most FX brokers do not allow withdrawals until you have settled your position and confirmed your profits.
If you want to convert your points into cash or use them as margin, you will need to settle your position.
Tips for FX trading when aiming for profits with swap points
When aiming to make a profit from swap points, it is important to keep the following tips in mind when trading.
- Trade with currency pairs and FX brokers that offer narrow spreads
- Diversify the currency pairs you trade
- Check margin requirements
We will explain each one in detail.
1.Trade with currency pairs and FX brokers that offer narrow spreads
The spread is the price difference between the buy price and sell price for each trade and is effectively the trading cost.
For example, if you buy USD/JPY at a buy price of 130.20 yen and immediately sell it at 130.15 yen before the exchange rate changes, you will lose 0.05 yen in costs.
If the spread is wide, the trading costs will be heavy and you will have less profit left.
Spreads vary depending on the currency pair and FX broker, so be sure to check before starting trading.
2.Diversify the currency pairs you trade
High interest rate currencies are also currencies with volatile price movements.
Therefore, if the price fluctuates in the opposite direction to your held position, you run the risk of incurring a large unrealized loss and losing more than the swap points.
In addition, swap points may be reduced due to fluctuations in policy interest rates, so the risk of loss increases if you limit your trading to one currency pair.
If you diversify your investments by trading other currency pairs, it will be easier to cover losses by trading other currency pairs.
3.Check the margin requirements
Emerging market currencies with high interest rates, such as the Turkish lira and Mexican peso, tend to have large price fluctuations.
If you get caught up in a sudden price crash and your unrealized losses increase, you may suffer losses due to a stop loss.
Stop loss is executed when your position falls below the margin maintenance rate set by your FX broker, so it’s important to frequently check your required margin to avoid stop loss.
Furthermore, if a sudden price fluctuation occurs and your account balance goes into the negative, a “margin call” will occur, which requires you to deposit additional margin.
If you want to prevent losses greater than your account funds due to a margin call, choose a broker that uses a zero-cut system.
A zero-cut system is a system in which an FX broker compensates for a negative balance when a trader suffers a loss greater than the margin.
XM has implemented a zero-cut system, so if you want to avoid losing more than your account funds, consider opening an account with XM.
Summary: Aim for profits in FX by understanding the precautions and tips for swap points
In FX, it is possible to earn swap points from the interest rate difference that arises when exchanging two currencies.
To make a profit from swap points, it is important to choose a pair of a high and a low interest rate currency and check the interest rate trends in each country.
However, high interest rate currencies tend to have large price fluctuations, so there is a high risk of a stop loss being executed.
If you do not want to incur losses greater than your account funds due to a stop loss, choose an FX broker that has a zero-cut system.
If you are looking for an FX broker with a zero-cut system, we recommend XM.
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