What is Swap in Trading? And How to Avoid It?

Swap Trading

A swap is a contract between two parties who exchange one financial instrument for another. According to the terms of the contract, this exchange happens at a specific time over the counter. Swaps can be used to protect against a variety of risks, such as interest rate and currency risk. In simple terms, a swap is an interest on a trade that you hold overnight in the market that you either pay for or receive. Depending upon the length & duration of your open trades, swap fees are determined. Swaps are also known as “rollover fees.”

Types of Swaps

Basically there are six types of swaps

How to Avoid Swaps?

You can avoid swaps completely by opening an Islamic account. Now, what are Islamic accounts? Well, Islamic accounts are Halal trading accounts that allow Muslims to trade without paying any interest or commission. Swaps must be paid if positions are kept open for longer than 24 hours. Brokers offer such types of accounts because Islamic financial laws forbid Muslims from giving or receiving any kind of interest and a swap is a form of interest. Islamic accounts are also known as the “No Riba Forex” or “Swap-free Forex” account.

Another way to avoid swaps is to close your trades on time. When there are no overnight open trades, there will be no rollover fees.

Why Do Swap-free Accounts Exist?

Muslims must follow a number of rules that come under Shariah and the holy Qur’an whether in trading or in general life. Taking or giving interest or usury is a forbidden act hence restricting Muslim traders from continuing their financial journey. With the advent of swap-free accounts, Muslim traders now have the choice of trading in the financial markets in accordance with Sharia law. When the traders go according to Islamic laws to earn from trading, it is completely Halal and permissible as it helps strengthen the financial condition. Often people have the misconception that Islam forbids trading – which is not true. Any trading activity that is fair and under Sharia Law is Halal.

Major Benefits of Using a Swap-free Account

The most important benefit of using a swap-free account is that Muslims all over the world can engage in financial markets without having to worry about any sort of interest or swap fees. Apart from this, there are also several other benefits – such as ease to choose any positions with major currencies without worrying about rollover fees. Traders may instead choose to base their trading decisions on analysing rather than taking into account the variations in interest rates. Swap-free accounts are free of any charges – which is another significant benefit. Furthermore, those who use long-term strategies will be the most profitable because now they don’t have to pay any extra charges for keeping their trade opening longer.

When trading in a standard account, you have to pay swaps no matter what your religious beliefs are. However Islamic accounts are initially built for Muslim traders, sometimes even non-muslims get to use this service depending on the broker. If you’re a Muslim and you want to open a swap-free account, you might be required to present any paperwork or other forms of identification that attest to your eligibility for a swap-free account and confirm that you are a Muslim.