SWAP, MARGIN & LEVERAGE
Understand what is Swap (Rollover), Margin and Leverage and how they work here
Swap in Forex is defined as an overnight or rollover interest (either earn or pay) for holding positions overnight in Forex trading. Swap rate is determined based on the interest rates of the countries involved in each currency pair and whether the position is short or long. In any one currency pair, the interest is paid on the currency sold and received on the currency bought. Each currency pair has its own swap charge and can be referred at the Instruments Overview. Swap charge is triple on Wednesday.
Example of Swap charged shown below are indicative rates and are subject to change based upon market volatility.
- Swap rate formula:Swap Earned / Pay = Current swap rate in USD per unit * lot size
- Example of Swap Rate Calculation
Long Swap of NZDUSD = +2.00 USD per lot Trade volume = 1 lot Swap Earned/Pay = +2 USD per lot x 1 lot Earn 2 USD per day
Margin is a good faith deposit that a trader puts up for collateral to hold open a position. More often than not margin gets confused as a fee to a trader. It is actually not a transaction cost, but a portion of your account equity set aside and allocated as a margin deposit.
When trading with margin, it is important to remember that the amount of margin needed to hold open a position will ultimately be determined by trade size and the leverage you choose. As trade size increases, your margin requirement will increase as well.
There are 2 types of margin found in common trading platform. First is the Used Margin, the amount of money that locked up to keep your current positions open. You can unlock the Used Margin by closing your active positions. Second is the Free Margin which is the money in your account that is available to open another new position.
Additionally, the margin also plays a role as the credit limit to what the trader cannot surpass, positions will be forced to close if the Margin Level (Equity divided by Used Margin) fall below 30%.
Leverage is just like borrowing from FxCitizen and it allows trader to control larger trade sizes. Traders will use this tool as a way to magnify their returns. It is imperative to stress that losses are also magnified when leverage is used. Therefore, it is important to understand that leverage needs to be controlled.
Let’s assume a trader with Equity of 1,000USD chooses to trade one mini lot of the EURUSD, this trade would be the equivalent to controlling 10,000USD because the trade is 10 times larger than the equity in the trader’s account, the account is said to be leveraged 10 times or 1:10. Had the trader bought 20,000 units of the EURUSD, which is equivalent to 20,000USD,his/her account would have been leveraged 1:20.