What is swap-free forex trading and how does it work?

Forex traders have access to the markets 24 hours a day on weekdays. Forex is the most accessible asset class to trade, which attracts millions of traders every day. However, Muslim traders that follow Sharia low might feel conflicted as Quran’s teachings forbids charging loans with interests and gambling. Regular Forex accounts are charged with interests or keeping positions open overnight and Forex trading is a form of betting technically, as traders trade CFDs and not actual assets.

Forex brokers are offering interest free or more commonly called swap free accounts to traders of Muslim fate to make it possible for them to place orders without going against their religious beliefs. While it’s true that Forex trading is spread betting, trading is not gambling. Many traders treat trading as a business and not as a casino. Trading can become a great source of income for certain individuals that put hard work and resources into the process of developing.

If you are interested in swap-free forex trading but are unsure where to start – this guide is for you. Let’s find out what Swaps are in more detail and how Muslim traders are using swap free accounts.

What traders need to know about swaps in forex

• A swap in forex refers to the interest payment/income applicable to a position held overnight
• Swap rates are tied to the interest rates set by the central banks of issuing countries of each currency
• Swaps will not be charged unless positions are held for more than 24 hours
• Swap-free accounts do not charge overnight fees
• Swap-free accounts were created with Muslim traders in mind, who are forbidden from making/receiving interest payments
• Certain currencies will generate interest through swaps when held overnight
• In a currency pair, one currency is always measured in relation to another. Each currency has its own interest rate. Negative currency swaps can occur when traders hold a currency that has a higher interest rate compared to the acquired currency

Islamic swap free accounts for forex traders

Sharia law forbids Muslim traders to participate in activities that involve interest payments. This means that highly speculative asset classes, such as futures and options are prohibited for millions of traders. Swap free accounts are also known as Islamic accounts and these accounts do not charge commissions. Instead, brokers might increase spreads or charge traders increased administrative fees.

Rules for islamic traders

Spot trading in Forex is permitted by Sharia law, as it does not involve interest rates and/or gambling. While it is true that certain guidelines exist about what Muslim traders can trade, some asset classes and trading strategies blur the line between halal and haram. Brokers do their part by offering Swap Free accounts. Traders, on the other hand, need to do theirs and treat trading as a business and not as a gambling house.

Difference between swap-free and islamic accounts

While brokers generally offer swap-free accounts to muslim traders to trade in accordance to Sharia law, it may also have limited appeal to muslim traders in some cases.

Full-fledged islamic accounts offered by brokers are built from the ground up to comply with Sharia law, which means limiting access to highly speculative derivatives and options, while also charging no swaps for overnight holdings.

Swap-free accounts, on the other hand, may have a broader appeal and simply discard swap charges, while still maintaining access to derivatives and CFD trading, which in most cases, is forbidden by Sharia law.

Swap-free and islamic accounts may not always be synonymous with each other, however, in practice, they often refer to the same account terms and restrictions.

Is Swap-Free Forex trading more profitable?

In general, profitability depends on a trader. There are traders that make a lot of money using both account types and there are a lot of traders that lose money using both. When comparing Islamic accounts in Forex with regular ones, it’s logical to think that swap free is better since there are no overnight charges. However, this is not the case. Brokers need to collect revenue to continue providing financial services to their customers. Usually brokers compensate by increasing other fees such as spread markups, commissions and administrative fees. In fact, Islamic compliant accounts generally offer limited trading instruments compared to regular ones. It’s recommended to only open a swap free account if you are unable to trade otherwise due to your religious beliefs.

Main takeaways from swap-free forex trading

• Swaps are interest rates charged on forex positions held overnight
• Interest rates are based on the rates upheld by central banks of issuing countries
• Muslim traders are prohibited from participating in trades involving swaps
• Swap free doesn’t mean less costly as brokers usually compensate by increasing other fees.
• Swap-free forex accounts are synonymous with Islamic accounts.
• Swap-free trading benefits traders in terms of fees and cost-effective long-term strategies

FAQs on swap-free forex trading

What is swap in forex trading?

Swap in forex trading refers to an interest paid to or charged on positions held overnight. Each currency has a different interest rate set by its respective centrals.

How do swap-free accounts work in forex?

Swap-free accounts give traders the opportunity to hold positions overnight without any additional cost. These accounts are often synonyms with islamic forex accounts as they are typically geared towards muslim traders that are prohibited from engaging in speculative trading, gambling, and trades involving interest payments.

Is swap-free Forex halal?

Swap-free forex trading is halal as long as it is not highly leveraged or speculative. Spot trading Forex is considered to be halal and is the safest route to take for muslim traders. Derivatives and leveraged positions are considered to be haram.

Are Islamic forex accounts swap-free?

Islamic Forex accounts are swap-free. Which is in line with Sharia law. Sharia law prohibits muslim traders from engaging in activity that involves receiving/making interest payments. Since swaps are interest payments paid for overnight positions, they are considered haram and are not present in islamic forex accounts.

Are swap-free forex accounts good for traders?

Swap free accounts are beneficial for Muslim traders. However, traders should avoid opening Swap free accounts if they do not follow Sharia. While there’s no swaps, traders usually pay increased fees by their brokers.