Why is with Forex trading strategies: SWAP AND FLY?
Every forex transaction involves the borrowing of one currency to buy another. This transaction also forms the basis of why traders can go long or short at any time.
As an example, if you are buying a currency with a higher interest rate than the one you are borrowing, the net interest rate differential will be positive, and you earn interest for every day that the trade open. Conversely, if the interest rate differential is negative, you will have to pay interest for every day that the trade remains open. You may know this as the carry trade.
Five P.M. in NewYork is considered the beginning and end of the forex trading day. Hence, any trading positions that are open beyond 5 P.M. are considered to be held overnight—or rolled over—and are subject to swap rates. The forex market is closed on Saturdays and Sundays, so no swap rate is incurred or earned over the weekend. However, most liquidity providers still apply the swap rules over the weekend.
To balance the effect of non-trading activities over the weekend, the forex market books three days of swap on Wednesday. Hence, if you hold a trade over 5 P.M. on a Wednesday evening, you will either incur or earn three times the normal rates.
The swap and ﬂy strategy is a slow but steady technique that helps you to accumulate interest every day. You can even come out with a positive return after a period of time, even though the trade exits at breakeven.
Figures 9.1 and 9.2 show how you can track which currency pairs give positive swap when you execute a long or short position in the currency market. Do note, however, that ﬁgures may be different for different brokers.
FIGURE 9.1 Positive Swap for Long Trades on AUD/JPY
FIGURE 9.2 Positive Swap for Short Trades on GBP/AUD
The swap and ﬂy method works with the daily candle (D1) and weekly candle (W1). This means that each candle on the chart represents 1 day or 1 week of price movement.
Detail about this forex strategy:
No indicators are used for this strategy.
This strategy is suitable for all currency pairs listed on the broker’s platform that have positive swaps for either long or short positions.
The main aim of this strategy is to earn as much interest as we can. Hence the ﬁrst step is to ﬁnd out which currency pairs on the broker’s platform offer the highest swap rates for both long and short positions.
If a positive swap is given on a long position, we look for a suitable long entry on the chart. If a positive swap is given on a short position, we look for a suitable short entry on the chart.
The next milestone is to shift the stop loss dynamically to the entry price, also known as the break-even price. This step is done when the market moves favorably in our direction. After a period of time, even if our “new” stop-loss level is hit, the trade is exited with a proﬁt because of the swap earned.
This strategy can be used in conjunction with any other high-time frame strategies. To illustrate the effect of this strategy, I am going to use common candlestick patterns, such as three white soldiers and three black crows, to illustrate a long and a short trade.
Three white soldiers is a bullish candlestick pattern consisting of three consecutive bull candles. Three black crows is a bearish candlestick pattern consisting of three consecutive bear candles.
Long Trade Setup with this forex strategy
We use the AUD/JPY on the daily time frame to illustrate the long setup.
Here are the steps to execute the swap and ﬂy strategy for long:
Identify a three white soldiers candlestick pattern. (See Figure 9.3.)
Enter long at the opening of the next candle.
Reference a recent signiﬁcant low to set the stop loss. (See Figure 9.4.)
Once the market moves in your favor at a risk to reward ratio of 1:1, shift your stop loss to the entry price. (See Figure 9.5.)
Trade hits breakeven after 36 weeks (252 days). (See Figure 9.6.)
FIGURE 9.3 Identify a Three White Soldiers Candlestick Pattern
FIGURE 9.4 Set Stop Loss and Profit Target
FIGURE 9.5 Stop Loss Shifted to Entry Price
From the long example in Figure 9.6:
The swap for holding a long AUD/JPY position was AUD12 for every standard lot. This is equivalent to 1.2 pips. The swapper week is 1.2 pips × 7 = 8.4 pips. The swap for 36 weeks is 8.4 pips × 36 = 302.4 pips.
FIGURE 9.6 Trade Hits Breakeven After 36 Weeks
Once the position hits breakeven, there is no more risk for the trade.
Swap is continuously earned for every day that the trade is open.
Short Trade Setup with this forex strategy
We use the GBP/AUD on the daily time frame to illustrate the short setup.
Here are the steps to execute the swap and ﬂy strategy for short:
Identify a three black crows candlestick pattern. (See Figure 9.7.)
Enter short at the opening of the next candle.
Reference a recent signiﬁcant high to set the stop loss. (See Figure 9.8.)
Once the market moves in your favor at a risk to reward ratio of 1:1, shift your stop loss to the entry price. (See Figure 9.9.)
Trade hits breakeven after 35 weeks (245 days). (See Figure 9.10.)
From the short example in Figure 9.10:
The swap for holding a short GBP/AUD position was AUD14 per standard lot, which was equivalent to 1.4 pips. The swapper week is 1.4 pips × 7 = 9.8 pips. The swap for 35 weeks is 9.8 pips × 35 = 343 pips.
Once the position hits breakeven, there is no more risk for the trade. Swap is continuously earned for every day that the trade is open.
FIGURE 9.7 Identify Three Black Crows Candlestick Pattern
FIGURE 9.8 Set Stop Loss and Profit Target
FIGURE 9.9 Stop Loss Shifted to Entry Price
Short positions on GBP/AUD and long positions on AUD/JPY give the highest positive swaps. For maximum results on this strategy, it is prudent to choose the currency pairs that yield the highest positive swap on the broker’s platform. Do take note that swap rates are not ﬁxed. They move in tandem with central banks’ rates.
Once the trades are executed, the ﬁrst milestone is to shift the stop loss to breakeven so that there is no more risk attached to the trade.
We then allow the trade to remain open every day until the new stop loss is hit. Doing this allows us to earn positive swap every day.
Traders can also choose to close this trade before it exits, provided the risk to reward ratio is favorable. As an example, traders can choose to exit the entire position totally if the risk to reward ratio yields a minimum factor of 1:3.
For the long AUD/JPY trade, the stop loss was 570 pips. Hence, traders could have chosen to exit the trade entirely if the AUD/JPY was at a minimum of 1710 pips (570 × 3) above the entry price.
For the short GBP/AUD trade, the stop loss was 725 pips. Hence, traders could have chosen to exit the trade entirely if the GBP/AUD was at a minimum of 2175 pips (725 × 3) below the entry price.