How Do Forex Spreads and Swaps Work?

By Yi Jie, a Strategist at Phillip Futures

Many of us may have had the fantasy of being a savvy forex trader at some point in our life, but due to work or personal life commitments, we may not have had the time to learn more about forex trading.

Forex is essentially an investment product that allows you to efficiently utilise your capital to gain currency exposure through leverage. In Singapore, brokers that are regulated by the local authority, typically offer 50 times leverage of the margin/capital required to enter into a forex trade.

Leveraged trading or margin trading allows you to take a position of a larger contract size (typically around a $100,000 in value for a regular sized contract or about $1,000 for a micro sized contract) with a smaller capital. This way, your realised gains can be magnified. However, leveraged trading is also a double edged sword, hence, your losses, without proper risk management, can be magnified too. That is the reason why it is recommended that investors put aside a sum of money that they can afford to lose when trading more rewarding, but riskier, products like forex.

Why a good broker is essential?

When it comes to forex trading, it is essential to pick a broker that is right for you. Hence, having an in-depth understanding of forex spreads, swaps and whether there are any platforms fees, is highly important to the new FX trader. Not having a good understanding of these may result in your realised profits being smaller, thus resulting in inefficient trades.

How do swaps work?

Every currency trade has a future value date (T+2), which determines its value of the trade, tagged to it. When an open position is held past the New York close (SGT 5am) each day, the value date is brought/swapped forward by a day. Swapping one date for another date in the future entails a swapping cost or swap charge that is earned or paid out. These charges are determined by the interest rates for each country making up a pair. Generally, you would pay interest for the currency that you have sold and receive interest for the currency that you have bought. So to determine if you would have to pay or receive interest, you would have to look at the net sum of interest for a pair. You would receive interest if the net sum of interest for our currency pair is positive, and pay interest if the net sum of your currency pair is negative.

An example of how a swap works

For example, if you are in an existing long position of USDSGD (Buying USD, Selling SGD) at 1.3700 and the swap points is currently at -0.0001. This means you would only need to pay 1.3699 instead as you would have made a swap interest gain of 0.0001 point.

Conversely, if you are in an existing short position of USDSGD (Selling USD, Buying SGD) at 1.3700 and the swap points is currently at -0.0001. This would result in a swap interest of 0.0001 being paid as the selling price has been lowered to 1.3699.

What are forex spreads?

The first concept to master would be to know the difference between a ‘bid’ and an ‘ask’ price. An ‘ask’ is the amount that a currency would be sold to you. Whereas a bid, refers to the price that a currency would be bought from you. Essentially, the difference between the bid and the ask price is known as the spread.

For example, if the bid and the ask prices for EURUSD is 1.1300 and 1.1302, the resultant spread is 2. The smaller the spread, the more beneficial it is to a trader as the cost to enter into a trade is smaller. Higher spreads would result in a trader’s profit margin being eroded. For a popularly traded currency pair like the EURUSD, spreads may be as low as 0.6 pips in the market.

Phillip Futures offers low and highly competitive spreads with their advanced Phillip MetaTrader 5 (MT5) platform. A summary of the average spreads for popularly traded pairs are below:

How to learn more about forex trading

For a beginner, learning more about the various currency pairs, trading techniques and how a modern trading platform like the Phillip MT5 can help you with risk management is essential. This advanced platform also enables you to incorporate trading robots or back testing a trading strategy to give you more insights on how you can further fine tune your trading strategy for success.

To get started, you may click here to sign up for FREE seminars offered by Phillip Futures. Or if you prefer to get a hands on feel of the platform, you may click here to request for a Phillip MT5 demo account.

However, if you prefer a customised one to one coaching session, coupled with a platform walkthrough, you may click here to select a coach of your choice.

 

Yi Jie

Yi Jie is a Strategist at Phillip Futures. As part of the Forex/Bullion desk, Yi Jie specialises in the business development of products and platforms to support the trading needs of clients.

Yi Jie is also very involved in engaging the trading community by constantly organising campaigns, events and incorporating trading features that benefit clients. He is an expert in the Phillip MetaTrader 5 (MT5) platform. His market views and comments have been regularly published in The Business Times, Lianhe Zaobao and Zuu Online.

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