What Is a Swap-Free Trading Account and How Does it Work?

Online trading is open and available to anyone who is interested. It is not exclusive to any particular profession, country, or geographic region. All you need is to open an account, deposit funds, and start trading at any time.

Although day trading does not have any restrictions or limitations in this regard, some religious groups may face various restrictions from trading the markets due to their beliefs. This is where swap-free trading accounts come in.

It’s important to note that trading carries a high level of risk and is not suitable for all investors.

Key Points

• Swap-free trading accounts, are designed for traders who cannot engage in swaps or interest-related transactions due to religious beliefs, offering an alternative with administration fees instead of overnight interest charges.
• Instead of overnight interest charges, swap-free accounts apply administration fees as an alternative
• In trading, a swap is the interest paid or received for holding a position overnight, calculated from the interest rate difference between the traded currencies.

What is Swap in Trading?

Swap is the interest paid or received for holding positions overnight. It can be negative or positive based on the interest rates of the currencies you are trading. However, since not everyone can pay or get such fees, most traders offer swap-free options.

A swap-free trading account is free from swap fees, which means that traders neither pay nor receive the fee (swap).

Vantage’s Swap-Free Accounts do not involve any swaps or interest charges on overnight positions. Instead, an administration fee is applied to positions, which is deducted from the account balance. 

This account type is designed to cater to traders who, due to their religious beliefs, are unable to engage in swaps or interest-related transactions.

What is a Swap-free Trading Account?

As the name suggests, a swap-free trading account eliminates swap fees. A swap is a fee charged by brokers when traders keep positions open overnight. With a swap-free account, you can trade without paying overnight fees.

These accounts are interest-free, making them ideal for Muslim traders who follow Sharia law. Swap-free accounts have become popular among Muslim traders because they align with religious beliefs prohibiting interest (riba).

Swap-free accounts, however, are not limited to Muslim traders. Non-Muslim traders facing similar restrictions due to their religious beliefs can also use these accounts.

Islamic law prohibits charging or receiving interest (riba). However, the teachings of Prophet Mohammed permit currency exchange.

Swap-free accounts allow traders to participate in the markets, regardless of their religious beliefs. There is still debate about whether these accounts are really halal. However, the final decision is up to each person.

Many Muslim traders think that swap-free accounts solve the problem of interest. This is why people often call them Islamic trading accounts.

How is Swap Calculated?

Online brokers usually pay or charge differential interest on currency pairs if positions are carried over to the next day. At the end of a trading day, you have the option to maintain your position overnight. This will generate interest, which brokers will either add (pay) or deduct (charge) to the client’s account. This is standard practice in some markets, including Forex trading and gold trading.

The interest is generated from fluctuations in exchange rates that occur overnight while the financial markets are closed.

What Happens When You Leave Your Position Overnight?

Swap fees are important when holding positions in forex trading. If you hold positions overnight, your broker may charge swap fees based on the interest rates of the currencies you are trading.

In a swap-free account, these fees are replaced with administration charges, allowing you to trade without incurring traditional overnight swap costs.

It is important to note that interest can either be negative or positive. Differential interest is the difference between a currency pair’s interest rates. For instance, suppose you want to buy Euros and sell US dollars. For example purposes, if the Euro has an interest rate of 4.5% and the dollar’s is 3.7%m the differential interest rate will be 0.7%.

The rollover amount is the amount that will be added or deducted from your account.

Keep in mind that this can be a little as a few dollars a night or as much as hundreds or thousands of dollars.

How do Swap-free Accounts Earn?

Swap-free accounts, also known as Islamic accounts, generate revenue purely through foreign exchange. They eliminate not only the restriction on interest but also the prohibition on gambling, as required by Sharia Law. Before starting active trading, it’s important to know that trading carries a high level of risk and to fully understand the risks of margin trading and the currency market.

If you’re new to trading, why not try a swap-free Vantage demo account? You can practice trading with virtual credit using the demo account to help you familiarise yourself with the markets. Just remember, trading carries a high level of risk, so always consider your financial situation before live trading.

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