How Traders Lose Profits

Read This, and Start Profiting!

If you are a FOREX trader and your profits are disappearing even when you think you are doing everything right, most probably, you are getting hit by brokers with overnight swap charges. Read this article to know all about these charges and what factors are involved.

The concept of overnight swap charges – demystified:

Remember: FOREX trading is in reality an exchange of currencies. You borrow one currency and exchange it with the currency you already have. In a nutshell, overnight swap charge is the difference in interest rates applied to currencies at the time of exchange. You pay a fee according to the interest rate applied on the currency you borrowed. On the other hand, you receive a return according to the interest rate applied on the currency you exchanged. This interest rate is affected by many causes such as the difference in exchange rate of the two currencies being traded.

Ideally, the fee you pay and the return you receive according to the rule defined above should balance each other and cancel the swap charges at the end of trading. But this is not the case due to many factors such as:

• Trader mentality: FOREX traders have a tendency to acquire a currency whose value is increasing. They exchange a currency of lower value with a currency whose value is on the rise. There are surely profits in this scheme in the long term but it should not be forgotten that the interest rate also increases on the currency with rising value. The trader will be paying exorbitant fee as the interest rate difference will be huge in favor of the high valued currency he’s borrowing for a long term.
• High leverage – high overnight swap charges: Before using high leverage, never forget that the interest rate will be applied on all the borrowed money, not just on the margin put on the specific trade. High interest rate on borrowed money will lead to high overnight charges.

Ironically, the above mentioned factors do not have as devastating effects as the losses traders experience due to defiant broker behavior when it comes to overnight swap charge. Consider following points:

• No standard formula: Different retail FOREX brokers have derived their own formula for calculating overnight swap charges. An inexperienced trader will never be able to decipher how he’s losing money until he does in-depth research.
• Lack of disclosure: These charges are never displayed on any broker’s website. The only authentic source for the applicable rates is to check the brokerage feed on any MT4 platform.
• Questionable administration fee: Most brokers add ‘administration’ fee on top of the overnight swap charges which can lead to trader earning nothing even if the interest rate difference is positive in his favor.

By charging a significant fee every night on all the positions a FOREX trader keeps open, brokers indirectly discourage the traders from implementing long term trend based trading strategies. Call it abusive, or hideous, or whatever the reasons brokers exploit these charges, it is the responsibility of the trader to seek out every bit of information before executing any trading plan.