Let's see what a swap is. A swap is a combination of two conversion opposite transactions with different currencies for the same amount, but the equivalent of one.
The swap accrual mechanism is approximately the same. When a trade transaction is conducted in the Forex currency market , the currency that the trader buys (buy) is virtually deposited on a bank deposit, and the sold trading currency (sell) is taken on credit. If a position on a currency pair is swapped, then its state (size and volume) is saved until the next swap.
In case when the interest rate on the deposit is greater than the credit rate, a swap will be credited to the trader’s trading account. It may well happen, and vice versa, when the credit rate is higher than the deposit rate, then in this case the swap will not be charged, but debited from the trading account. That is, payment of a swap (“negative swaps”) or an additional payment (these are “positive swaps”) arises due to different interest rates on deposits and loans in different currencies.
A currency swap is an agreement between the parties that enables them to exchange denominations in different currencies and with fixed interest according to a specific schedule for a period agreed in advance.
If the delivery date for the futures market is previously agreed upon in the futures contract, then in the Forex market, since it is spot, the currency is delivered the next day. This means that if a trader bought the euro today and sold the dollar, then, in theory, he should carry out this operation in reality the next day. But the trader earns on the difference in exchange rates and he does not need the currency itself - this is just a tool. This is where the need for a swap appears.
In fact, a swap is a fee charged in the Forex market for transferring an open position overnight. Forex swap each country has its own interest rates. At night, the trader’s position is closed and immediately a new one is opened, thereby giving him the opportunity to avoid the delivery of currency in reality until the next day. And while the position remains open, the swap operation is repeated, and the date of delivery of the currency is thus transferred. If a trader manages to open and close his position during the day, he does not need a swap operation.
A swap occurs within literally a few seconds. We can say that the position that is being closed and reopened is almost identical, with the only difference being that the trader will either be charged a small commission, or, conversely, credit it. This is due to the different interest rates of traded currency pairs set by the Central banks of each country.
A swap is also a tool that eliminates interest rate risk. Whether a swap will be charged or, conversely, will be withdrawn depends entirely on the ratio of interest rates of the particular currency pair used.
The swap operation takes place in the MetaTrader trading terminal at 21:00 GMT and is automatically converted into US dollars. Swaps from Friday to Monday are charged only in one day, while from Wednesday to Thursday they are charged in triplicate.
What is the reason why the largest swap is debited or charged precisely on these days of the week? If we recall once again the features of the Forex market, it turns out that the transfer from Wednesday to Thursday of the date of conclusion of the position is equivalent to the transfer from Friday to Monday of the settlement date - for three whole days. It is possible for a trader to charge a swap in three days, but it is possible that they will write off the swap, but again in three days.
A swap transaction affects profit generation. Therefore, it is so important to understand its principle. By the way, there is a certain category of traders who quite successfully earn on a swap. Transactions of this type are called carry trade transactions.