Dealers usually regard remittance for keeping a position open overnight (also known as swap) as an extra fee which they should provide for their broker, as Swap is more often than not negative for the majority of currency pairs. To simplify, it is debited to the account of the customer. However, this is not the case for all the currency pairs. Swap for some currency pairs is in fact positive, which is why, traders sometimes try to make money out of the FOREX market when the trading session concludes on Wednesday.
Fuad Ahmed in this article will help us understand the occurrences that take place on FOREX market prior to charging Swap. So firstly, let’s state what Swap is. Swap is an agreement between two contrasting sides of contracts, one of which closes a trade happening formerly and the other initiates a similar trade, but for a different value, so that the monetary value of retaining the position is also taken into account. Therefore, investors and banks achieve daily settlement procedure.
Dealers, who attempt to make profit utilizing the Triple Swap Strategy, typically act in the certain way: as the interest rate on AUD is higher, they purchase Australian Dollars in exchange for US Dollars, 25 – 35 seconds before the Swap is applied, which in simple terms means that they go Long AUDUSD but they don’t give any thought to the way the trend is heading. 10 – 15 seconds subsequent to the Swap being charged, dealers liquidate that order. It is crucial to keep in mind, that the complete cycle of the settlement is executed between the period when the transaction is started till the time it’s liquidated.
In the event that at a predetermined time cost has taken off or remained unaltered, the customer by closing the transaction gets either positive or zero profit along with a positive swap. However, if there is an adverse movement of the price the exchange will clearly will be negative. Be that as it may, the customer will presumably get an amount which is the difference between the positive swap and the negative swap plus the fee for the broker.
Fuad Ahmed defines carry trade as an investment strategy unlike the Triple Swap Strategy which is a brief time span technique. Carry Trade focuses on acquiring a low interest rate currency and putting the earnings into a high interest currency. By subtracting the two interest rate yields, we get the proceeds.
By going for this strategy for investment, trader agrees to the danger of unfriendly costs development on an amount.
Presently, the interest rate for USD is lower than the interest rate for AUD, which is why, the number of long positions on AUDUSD pair is notably larger than the short positions. When the trading session concludes, the long positions on AUDUSD are liquidated which leads to a considerable number of deals made for the Australian dollars. Hence, this results in a lower level of BID quotes which broadens the spread, whereas the level of ASK quotes remain unaltered.
On the Electronic Communication Network, the BID and ASK prices are created by the “Depth of Market” which are also commonly known as Level 2.
The ECN technology operates by uniting data obtained from investors or bankers with broker’s personal book of limit orders, in order for the present volumes to form a liquidity pool at different price levels.