One needs to comprehend the idea of a ‘swap’ to understand the concept of a no swap forex account. To a beginner the whole of forex trading is replete with technical terms and abbreviations which seem illegible at first. But to be a successful trader in forex, any beginner needs to understand the whole of it on a conceptual level to apply it for trading. Everyone is faced with this very common question at some point of time – what is a swap free account in forex? Here is an in-depth explanation from the very root of the whole topic.
The term ‘swap’:
Swap in forex is what the term literally refers to, an exchange between two parties of a commodity which is either similar or substitutive. In FX, swap is a contract where two engaging parties agree to exchange their respective financial assets which they have decided to trade in.
Traded assets are more often than not of a similar value. Transactions between the assets are often over-lapping and happen during the same timeframe. Such an account is exactly opposite to what is a swap free account in forex.
No swap forex account:
Swaps are one of the many intra-trade activities through which brokers or brokerage firms directly earn from an FX trade. Considering that, a currency asset is bought on a Monday and a trader wishes to keep it in an open position through to Wednesday. An interest is charged as per the timeframe during which this asset is open. Mostly, interest is set in the currency where the trader has gone long and for the currency in which he has gone short.
A no swap forex account is where this interest is absent. In these forex accounts brokerage firms earn not from open positions stretching beyond the day but from daily trades. Even if the trader has left an open position extending beyond a day, trading firms accommodate this long or short position by buying or selling on a daily basis as per the investment/asset.
How are these accounts different from normal accounts?
Considering two accounts- one an Islamic account and the other a normal FX trading account. If a position is opened and maintained in an Islamic account, the investor or trader will not be liable to pay for the interest differentiation on this position. However, in case of a normal account, the investor or trader will be liable to pay for the interest differentiation of the investment.
Benefits of a no swap forex account:
These accounts were primarily devised for Islamic traders who are forbidden from swaps due to Sharia laws. The benefits are primarily two-fold:
- No brokerage surcharge or loss of interest from currency exchange
- Trading in these accounts is limited to one single day wherein the asset is used thus avoiding potential extensive loss.
So this is what is a swap free account in forex. There are certain benefits in availing a no swap forex account which are not only easier to manage but simpler to use too.