What is a swap-free trading account and how does it work?
A swap-free trading account is a trading account that does not require its owner to pay or receive interest. It means that positions held overnight will not be subject to overnight funding. Here you’ll find more information on what it means to have a swap-free trading account and how swap-free trading works.
What is a swap?
In trading, a swap is an interest adjustment incurred for holding a derivative such a cash CFD overnight.
For instance, let’s say you have a long trade on the Germany 30. If you held the position overnight, you’d need to pay an interest charge (swap) based on the one-month overnight rate offered, which is the interest rate that major banks charge to lend funds to each other. Most providers will also add a small admin fee to the interest charge.
While the adjustment for cash indices is generally based on the interest rate in the country the product trades, forex swaps known as Tom Next rates are used for forex adjustments. A Tom Next rate is the interest rate differential between the two countries the currencies belong to, with an element of market expectation.
What is a swap-free trading account?
A swap-free trading account, also known as a no-swap or interest-free trading account, is an account for traders who do not want to pay or receive interest. These accounts are exempt from overnight interest rate adjustments or rollover charges.
How does swap-free trading work?
With swap-free trading, you can trade a range of weekly futures contracts that expire every Friday. Futures contracts are free from interest, rollover and swap charges – you simply trade the asset at an agreed price, with all costs built into the spread. With IG, swap-free traders can deal on 10 major indices, 13 major forex markets, spot gold and spot silver.
Example of a swap-free trade
Let’s say the swap-free price of gold is $1280 (sell price) and $1285 (buy price).
If you sell three swap-free gold contracts with a contract value of $10 and a 5% margin (deposit) requirement, the margin equals $1920 (selling price x contract value x number of contracts x 5%). You then open the trade and leave the position to expire on a Friday. With a regular trade, you’d incur an overnight funding fee for each night that you held your position open past 10pm UK time – credited to your account as this is a short position. However, as you are trading swap-free, the overnight funding charge does not apply. If the market goes up by 46 points, you will make a loss of $1380, and if the market goes down by 46 points, you will make a profit of $1380 (46 points x contract value ($30)).
On the other hand, if you decide to buy three swap-free gold contracts at $10 per contract, with a 5% margin requirement, the margin equals $1927,50 (buying price x contract value x number of contracts x 5%). With a regular trade, you’d incur an overnight funding fee for each night that you held your position open past 10pm UK time – debited from your account as this is a long position. However, as you are trading swap-free, the overnight funding charge does not apply. You’ll make a profit if the market goes up, and a loss if the market goes down.
As you can see, there were no overnight funding charges in the above examples. Because they are swap-free trades, all fees are incorporated into the spread upfront and you won’t have any interest or rollover charges at all.
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