How does negative swap rates affects the trend?

Question

Ross · Accepted Answer

Negative swap rates can affect trading trends in various ways, especially in the forex and contract for-difference (CFD) markets. Swap rates are like overnight interest rates that traders either receive or pay when holding positions overnight. When these rates turn negative, it means traders might have to pay a fee to keep their positions open. This can impact trading strategies depending on how long traders plan to hold their positions.For traders who follow trends over several days or weeks, negative swap rates might make them more cautious. If they hold a position overnight, the negative swap rate could eat into their potential profits, making them think twice about keeping that position open. On the other hand, traders who only trade during the day and don't keep positions overnight might not be as affected by negative swap rates since they close their trades before the day ends.Another strategy called carry trading involves profiting from the difference in interest rates between two currencies. Negative swap rates can seriously impact this strategy. It's like wanting to make money from borrowing at a low-interest rate but finding out you have to pay for borrowing instead. Traders might avoid currency pairs with negative swap rates because the cost of holding those positions could be more than any potential profit.For those who use hedging strategies to protect against losses, negative swap rates can also play a role. Hedging involves taking opposite positions to offset potential losses. The cost of negative swap rates could impact the effectiveness of these hedging moves.In the bigger picture, long-term investors who plan to keep positions open for a while might rethink their strategy if faced with negative swap rates. The ongoing cost of these negative swaps could eat into their overall returns, causing them to reevaluate whether it's worth keeping those positions open for an extended time.

Thomas · Answer

The negative rates could imply that the markets view U.S. government bonds as risky after the prior bailouts of private banks and T-bond sell-offs in the aftermath of 2008. But that wouldn't explain the enduring popularity of other T-bonds of shorter duration, such as two-year Treasurys. Another explanation for the 30-year negative rate is that traders have reduced their holdings of long-term interest-rate assets and, therefore, require less compensation for exposure to fixed-term swap rates.Still, other research indicates that the cost of entering a trade to widen swap spreads increased because of higher regulatory leverage requirements.1 The return on equity has consequently decreased. The result is a decrease in the number of participants willing to enter such transactions.

Beon · Answer

Negative swap rates (also known as Rollover fees) essentially act as a "holding tax" on your positions. While they don't physically move the price candles on your chart, they exert a powerful invisible force on market trends through Smart Money behavior.1. Erosion of Long-Term TrendsNegative swaps are the enemy of "Buy and Hold" traders. If a trader is long on a pair where the swap is significantly negative (e.g., -15 points per night), their profit is constantly being "eaten."The Effect: This creates a natural ceiling for a trend. Traders are more likely to take profits early rather than let a winner run, which can cause an uptrend to lose momentum or stall at key resistance levels faster than expected.2. Strengthening the "Carry Trade" DirectionThe Forex market is heavily influenced by the Carry Trade. This is where big institutions sell a currency with a low interest rate (like the JPY) to buy one with a high interest rate (like the USD or MXN).Trend Impact: If you are trading against the positive swap direction, you are fighting the "Big Money." Trends that align with positive swaps tend to be smoother and last longer, while trends moving toward negative swaps are often choppy, volatile, and prone to sudden sharp reversals as traders bail out to avoid the daily fee.3. The "Wednesday Effect" and VolatilityMost brokers charge triple swaps on Wednesday nights to account for the weekend.Trend Impact: You will often see a "mini-reversal" or a sudden spike in volatility on Wednesday evenings. Short-term traders who are holding positions with high negative swaps will often close their trades before the 5 PM EST cutoff to avoid the triple charge, causing a temporary dip in the prevailing trend.4. Psychological Pressure on Retail TradersNegative swaps affect the "Pain Threshold" of a retail trader.The Effect: If you are in a "drawdown" (losing trade) and also paying a negative swap every night, your emotional stress increases. This often leads to panic-closing a trade right before it would have turned profitable, purely because the mounting fees make the loss feel unbearable.Summary Table: Swap vs. Trend    Swap Status                 Impact on Trend                                           Trader BehaviorHigh Positive SwapSupports a long-term, stable trend.Traders "sit" on positions for months; low volatility.High Negative SwapCreates a "heavy" or fragile trend.Traders scalp or exit quickly; trend is prone to "flash crashes."Zero/Low SwapNegligible impact.Price action is driven purely by technicals/news.Pro Tip: Always check the Instrument Specifications in your MT4/MT5 Market Watch. If you plan to hold a trade for more than 2 days, the swap rate should be a deciding factor in your Position Sizing.

How does negative swap rates affects the trend?

3 Answers

3 Answers

How does negative swap rates affects the trend?

3 Answers

3 Answers

Welcome back

Create Account

Reset password