Swaps (overnight interest) in trading can be either positive (a credit/profit) or negative (a fee/cost), depending on the interest rate differential between the two instruments in a pair and the direction of the trade. If you hold a currency with a higher interest rate against a lower-interest one, you receive a positive swap.
What is the difference between positive and negative swaps?
Remember, swaps can either be positive (you earn money) or negative (you pay money), depending on which currency has the higher interest rate and whether you're buying or selling the currency with the higher interest rate.
The swap reflects the interest rate differential between those currencies. If the currency you buy has a higher interest rate than the one you sell, you may receive a positive swap. If the opposite is true, a negative swap is charged.
An interest rate swap will have value — positive or negative — depending on where the swap rate is relative to the current market swap rate for its remaining term; or it's replacement rate.
Positive swaps are generated by buying a currency (the base currency) with a higher interest rate against a currency with a lower rate (the quote currency). In this instance, the investor generates a profit for holding a position overnight.
How to know if a swap is going to be positive or negative before you enter a trade.
Why are swap spreads positive?
Positive swap spreads usually suggest that swaps are riskier than Treasuries, reflecting credit risk in the interbank market and liquidity preference for government bonds.
The 90% rule in Forex is a cautionary saying that roughly 90% of new traders lose 90% of their capital within the first 90 days, highlighting the high failure rate in retail trading due to lack of discipline, education, and risk management, rather than a fixed statistical law. It emphasizes that Forex is a difficult skill requiring a business-like approach with proper strategy, patience, and emotional control to succeed.
We know from the numerical example above that when the swap fixed rate falls, the fixed-rate payer loses market value and the fixed-rate receiver gains. Therefore, the swap has negative duration to the long position (the “buyer”) and positive duration to the short (the “seller”).
Negative swap points arise when the domestic interest rate is lower than the foreign interest rate. In such cases, the forward rate is set below the spot rate, meaning that the rollover or forward contract carries a cost.
If the asset swap spread is positive, it means the bondholder is receiving a premium for taking on the bond's credit risk. If it's negative, the bondholder is effectively paying a premium to eliminate the bond's credit risk.
At its core, the 3-5-7 rule sets three clear boundaries: 3%: The maximum amount of your trading capital you should risk on any single trade. 5%: The total amount of capital you should have exposed across all open trades at any given time. 7%: The minimum profit you should aim to make on your winning trades.
A swap is a derivative contract in which two parties exchange the cash flows or liabilities of different financial instruments. Interest rate swaps are the most common type of swaps, often involving a fixed interest rate and a variable interest rate.
Conversely, during risk-on environments, investors may favour higher-yielding currencies, resulting in higher swap rates. Liquidity and Market Conditions: Liquidity conditions in the forex market can impact these rates. Thin liquidity or market disruptions may lead to temporary spikes or volatility in these rates.
To turn $100 into $1,000 in Forex, you need a disciplined strategy focusing on high risk-reward (like 1:3), compounding profits through pyramiding, and strict risk management (e.g., risking only 1-2% of capital per trade) using micro-lots on volatile pairs, while continuously learning and practicing on demo accounts to build skills without real capital risk.
The most correlated forex pairs are EUR/USD and GBP/USD, which have a strong positive correlation due to the close economic ties between Europe and the UK. EUR/USD and USD/CHF have a strong negative correlation because they move in opposite directions.
Liquidity is the amount of tokens available for a particular trading pair. If there isn't enough liquidity for the pair you want to swap, your transaction may fail or result in a much worse price than expected. Liquidity issues are particularly common with new or less popular tokens.
A negative swap value indicates that holding the position open overnight will deduct the swap amount from the trader's account, while a positive value indicates the accrual of the swap to their account.
Finally, the USD 30-year swap spread has remained consistently negative in the United States since late 2008, while in the Eurozone it was positive between 2015 and the end of 2023. However, starting in 2024, it has progressively declined further into negative territory.
Swaps are derivative contracts between two parties who agree to exchange assets with cash flows for a specified period of time. Some of the major risks involved with this market include interest rate risk and currency risk.
Buffett argues that stocks will continue to provide higher returns over the long run than bonds or cash. Invest the remaining 10% in short-term government bonds such as U.S. Treasury bills. This ensures liquidity (your ability to buy or sell with relative ease) while reducing your overall risk in market downturns.
Because swap rates are trading inside (lower than) Treasury yields, a Bank Loan + Swap is currently beating traditional fixed-rate financings like CMBS or LifeCo, which typically price over Treasurys.
How did one trader make $2.4 million in 28 minutes?
For one trader, the news event allowed for incredible profits in a very short amount of time. At 3:32:38 p.m. ET, a Dow Jones headline crossed the newswire reporting that Intel was in talks to buy Altera. Within the same second, a trader jumped into the options market and aggressively bought calls.
One popular method is the 2% Rule, which means you never put more than 2% of your account equity at risk (Table 1). For example, if you are trading a $50,000 account, and you choose a risk management stop loss of 2%, you could risk up to $1,000 on any given trade.
Earning $1000 per day in trading is possible, but it's not easy. You'll need a large trading account, smart risk management, and a consistent strategy. Most traders aiming for this level treat it as a full-time business, not a lucky side hustle.
