One question I have received many times over the years as a trader is how to handle or manage swap rates when holding long term trades? This is a good question and relates to all those traders that want to hold trades more than 3 weeks on some occasions and how they can do this without it being a big expense. It also relates in particular to those trend traders such as myself and many other traders, so let me give an insight into how to manage this important aspect in trading.
Firstly, before I answer this question, I first off want to give an insight into the different types of traders and where this topic will benefit. If you are the type of trader that never holds trades more than a week or is always thinking short term in trading then it is not needed to consider swap or rollover rate costs. The reason being is you are thinking short term and trading short term so these rates will have very little effect as a expense or a added credit profit.
As for those other traders that are trend traders or those that do hold long term positions, then read on..
What is Rollover or Swap?
Good question, that is where the broker charges or credits the difference in interest on a position that is held more than 24 hours. This can either be a small cost ( based on position size ) or small credit depending on market direction and interest rate difference.
A good example of this being AUDUSD, holding buy trades on this market earns a trader credit each day from the rollover interest difference as AUD ( currently as of writing this article Australia having 2% interest, average interest in Australia being 5% ) is favoured in buying against the US which has no interest rates ( 0 percent interest ). This credit amount then is added to the trade profit every 24 hours.
Now, if the opposite and selling AUDUSD then this means that the trader is buying a negative valued currency interest rate against the AUD currency and therefore they will pay a small cost based on size of trade each 24 hours. The cost difference in interest.
Now this small cost or credit is small when looking at its daily value only, however over long periods of time it can add up if negative, so below I will go over how one can manage this correctly.
How to Manage Negative Rollover or Swap Costs Long Term?
It is actually easier to manage negative swap costs than most traders think. Below is a few ways that can be used by a trader to reduce swap costs:
- Taking Partial Profits at first major management point.
- Balancing of Negative rollover swap positions to positive swap positions.
- Using Multiple Brokers to reduce costs of negative swap.
Okay, now let’s go over those ways in more detail.
Taking Partial Profits
Taking partial profits at first major management point is the easiest way of managing a trade when thinking long term on a position. This is also a good management principle as well. What this essentially means is cutting some of the profits away at first major management point on trade, this could be a third to a full half of that position.
What this does, is two things, it reduces risk on position by reducing size and it also allows remaining trade to run in trend with less size, thus meaning, to reduce rollover or swap costs on remaining position held.
To take that further at each next major management point you could take another small partial profit on that trade which allows reducing risk again and rollover costs while still holding the trade while that trend lasts.
This means that if the trend lasts over 3 months ( or much longer ) before the trend starts to shift in direction that the risk would be much smaller on the position held by the end of that phase. It also means that a trader has allowed for the most benefit from that complete trend move on that position with that market, as well as reducing risk and swap costs until the full management on that position is completed.
Balancing the trades is another way of reducing swap costs. Yes that is right, balance negative swap held positions with positive swap based trades. Now this one can be tricky and depends on the market and trends that exist, not all positive swap positions are in a trend that benefits that swap so this one really depends on market conditions and if that market is in a trend that supports that positive swap condition on a held trade.
One example of this though in the past is buying AUDUSD or NZDUSD ( not in uptrend currently ) when they were in uptrend ( using good technical points of course and methodology ) and holding them long term and not needing to reduce trade size on held position. Instead managing those beneficially held trades by locking in more pips on these markets. Meaning locking in stop loss based on trend evidence moves on that market and moving stop loss in direction of that trend bias as the trend moves more in the traders favour.
Then to complete the balance aspect, holding those positive swap trend based positions with the negative swap trend based positions and overall balancing out the negative to positive swap ratio difference between all trades held.
Another aspect is that not all pairs or markets have negative swap, some are mostly neutral, meaning that rollover or swap cost or credit is very small or insignificant. One example of this being EURUSD, whether buying or selling this market, it has often ( depending on broker ) a very small daily swap. However, I will note that there are also many other markets which have a close to neutral swap cost as well.
To get a complete swap or rollover cost or credit list ask your broker which can provide this information for you. Most brokers display it often on there website as well. Those costs or credits can vary depending on broker, so I always recommend using a good STP Based Broker.
Using Multiple Brokers
Another way a trader can reduce swap costs is by using multiple brokers to allow for benefits on both sides of swap rates. As an example, using a low cost negative swap broker with a high return credit swap broker. And yes, swap rates can vary a lot between different brokers. Often brokers that offer low swap costs do so on both sides ( whether a cost or a credit held swap trade ) so using a couple of brokers can help a trader benefit from these differences.
Those differences then allow a trader to open the negative swap trend based trade positions on a low cost swap broker and use a higher return positive swap broker for opening positive swap trend trade positions. Overall helping to reduce swap costs between the different accounts when holding trades long term.