Spread, Swap and Market Hours

 

Video Transcription:

Hey, traders. Welcome to Video 5 of the Forex Beginners Course. This is
Cory Mitchell. In this video, we are looking at the spread, swaps, and
market hours, three things that can be a little confusing for new traders.
We’re going to look at them in this video, brought to you by Investu.com.

So forex is a 24-hour global market. That means it’s a network of a whole
bunch of different banks, institutions, traders that compose this market,
which doesn’t have a central location like, for example, the New York Stock
Exchange, which has an actual centralized location.

The forex market is a global market, and it’s basically just a network of
everyone buying and selling from each other. So this creates a few oddities
compared to other markets. The spread isn’t really any different than other
markets, but it is something that a lot of new traders find a bit
confusing. So the spread is . . . There are always two prices in a
currency. There’s the bid and the ask.

So the bid is where people are buying, and the price that you need to sell
at if you want to get rid of your position. So those people are going to be
buying, let’s say, if we just use real simple numbers, people are buying at
one, and people are selling at two. So if you want to get rid of . . . If
you have a position and you want to get rid of it, you’re going to have to
sell to those people who are willing to buy at one.

Or your other option is to put out what we call an offer. So you’re going
to join the people at selling at two and hope that somebody fills your
order. We’ll look at how that works in just a minute. The offer is where
people are willing to sell, and the price that you would have to buy at. So
we have those people selling at two. If you want to buy something, you’re
going to have to buy from the people who are selling. So for each
transaction, there’s always a buyer and a seller.

So you can either sell to the people who are buying at one, or you can buy
from the people selling at two, or you can put your order really anywhere
else that you want and hope that somebody fills it. But if you want to get
an instant execution, you’re going to have to give people the price that
they’re asking for.

So the difference between the bid and the ask is called the spread. With
most types of accounts, the spread is about one to three pips you’re going
to find between brokers for the USD, for example, the most popular and most
liquid pair. You’re going to find spreads usually around one pip.

There is typically no commissions charged in forex trading because the
broker is going to make money off that spread. The actual spread that they
can achieve is smaller than the one pip. So by them charging you one pip,
they’re marking up the price a little bit. So that’s how they make their
money.

There are what are called ECN accounts, which is where you’re going to pay
a commission. So on my ECN account, I pay about $5 for each $100K that I
trade, but there is no spread, or it’s extremely small. So you can pay a
commission and have very little spread, or how most accounts work is you’re
going to pay a bit of a spread, but you have no commission.

So let’s see how that works. I have a little plugin here, which shows what
the current bids are and the current offers are. So you can see the current
. . . This is the current bid, and this is the current offer. You can see
people stacked up at different levels. You can see how much currency there
is. So if we switch that to quantity, we can see how much money is at each
one of those levels.

It’ll fluctuate constantly. So you have people stacked up, moving at a
higher price. So these people are offering, and these people are bidding.
It starts low and progresses up to the current price. So these are people
that are willing to buy. These are people that are willing to sell.

If you want to buy right now, you’re going to have to pay this price
because that’s where people are selling. You can bid this price, but you’re
not guaranteed to get into a position because someone actually . . . One of
these sellers is going to have to drop the price to get to your order. So
these guys are all just waiting down here for someone, for the price to
drop and for their order to fill.

These guys are all sitting at a higher price, hoping that the price rises,
and then they can get out or get into a position, sell at a higher price.
So these guys, waiting to buy at a lower price. These guys, waiting to sell
at a higher price. Any transactions that are going through, so each time
the color kind of changes, a transaction is going through, and someone is
getting filled at the current price.

So that gives you a visual of how the bid and the offer work. You can also
see the spread here. This is not an ECN account. So we can see the spread
fluctuating at around a pip. So this is just a general account. You’ll
typically see this. Some brokers, their spread is going to be a bit bigger.
Others . . . This one is probably the smallest you’re going to see for a
non-ECN account. Others are going to be a bit bigger, around two or three
pips.

So a lot of brokers offer a plugin like this, so that you can get used to
seeing how the bid and the offer works. This is just called a level two.
You can see that level two, and it also allows you to put out orders and
stuff like that. So if your broker does offer a plugin like that, it may
help you visually see how the spread works and how you’re going to get
filled. So you can kind of see if you put out an order, you’ll be placed in
this queue here for people who are waiting to get an order filled.

So the next thing we have to discuss is what we call swap or rollover. So
different countries have different interest rates. If the US has a .25%
interest rate in their country, and Australia has a 4% interest rate, there
is a 3.75% interest rate differential there. So Australia has a much higher
interest rate than the US is offering. This is determined by the Federal
Reserve in the US and other central banks in other countries.

So when these announcements come out, they are big. So when you look at an
economic calendar, you’ll see daily events. These are big ones because
interest rates determine this swap and rollover each night. So what is
that?

If you’re long, the Australian dollar . . . So let’s say you buy the
AUD/USD. You will receive a credit daily for this interest differential
because you own a currency that has a high interest rate, compared to the
other currency in the pair which has a low interest rate. So you are going
to receive a credit for that interest rate differential.

But if you take the other side of the trade, so you go long the USD and
short the odd, so you are long . . . or sorry, short the AUD/USD, you will
be debited the interest rate differential. So if you buy the higher
interest rate currency, you’re going to get the interest rate differential.
You’re going to be credited. If you buy the lower currency interest rate,
you are going to be debited each day.

The swap occurs at 5:00 PM Eastern Time. So no matter how long you’ve had
the position, you’re going to be credited or debited at 5:00 PM. So you can
potentially sort of, I guess, gain the system if you wanted to. You could
buy the AUD at 4:59 PM Eastern Time one minute before the swap, and you
would be credited with a tiny little debit into your account. It’s probably
not worth taking a position for because the potential gain or loss on the
position is going to be much bigger than this interest rate differential.
But no matter what time you buy it at or what time you take your position
at, every day at 5:00 PM, you are going to be credited or debited. You’ll
see it pop up in your account.

Brokers typically take a cut here as well. So it’s not going to be exactly
the 3.5, 3.75% in this case. Also, this is over a year. So you’re not going
to be credited with 3.75% every single day. You would be credited with
approximately 3.75% divided by however many trading days we have in a year,
about 220 or so. So it would be that divided by 220. So it’s quite a small
amount each day.

So we can see the current swap in MetaTrader. So here’s just MetaTrader. If
we pull up our market watch, we can see all of our pairs. We can go to
symbols, and it’ll bring up all our symbols. We can click on anything, any
pair that we want to see, so the AUD/USD. That’s the pair we were
discussing.

So the Australian interest rate currently is higher than the US dollar. So
if you buy this pair, the AUD/USD, you’re going to make a little bit each
day at 5:00 PM. If you sell the AUD/USD, so you’re short the Australian
dollar, then you are going to be debited each day at 5:00.

So just click on “Properties”. We can see what that actually is going to
be. So it says here, “Contract size is $100,000.” So that means it’s giving
us this first standard lot. So if you buy $100,000 worth of the AUD/USD, at
5:00 PM swap long. You are going to be credited with $4.59. So just for
holding that position, this is in addition to whatever you make on the
actual trade, the fluctuation of that currency pair. You are going to be
credited with $4.59.

So if you only had a $10,000 position, you would divide that by 10. So you
would make 45.9 cents. If you have a $1000 position, you’re going to make
4.59 cents. So it’s generally not a huge thing. You probably don’t want to
take positions solely based on this, but it is something to keep in mind.

For a contract size of $100,000, if you are short, so that means you sold
the AUD/USD pair, that means you’ve sold the Australian dollar, the higher
interest rate pair, the higher interest rate currency, you are going to be
debited $7.79.

If your position is only $10,000, you’re going to be debited 77.9 cents. If
your position is $1000, you’re going to be debited 7.79 cents. So that is
how that works. This is just a demo account. So if you open up your thing,
you’re going to see a swap here. So if you have a position, the swap is
going to show up in this column at 5:00 PM Eastern time. Then it will just
accumulate until the position is eventually closed. So you’ll see your
profit and loss on the actual position, and also your swap.

So in that case, if we go back to the Australian dollar . . . So if you’re
long the AUD/USD, and you have a position in it, you are going to see a
swap of $4.59 pop up here at 5:00 PM Eastern time. If you’re short, you’re
going to see a debit of $7.79.

So market hours is another one. The market is open 24 hours during the
week, starting at 5:00 PM Eastern Time on Sunday night, and it closes on
5:00 PM Eastern Time Friday evening. In between that time, it’s open 24
hours. It trades 24 hours because there’s always a market open somewhere,
which means there’s banks and institutions doing business and providing
liquidity and needing liquidity.

So here is . . . If you just go Forexmarkethours.com/markethours.php,
you’ll get this little popup window. It shows you the major market hours,
and you can change your time zone to whatever. So I have this set to New
York time. You can see the current time here, so that you can check it to
make sure that it’s accurate. Then according to that time, it’ll convert
what the market hours are for this timeframe. So in Eastern Time, this is
when all the markets open.

You can see there’s always one market open. So New York closes, Sydney
opens. While Sydney is open, Tokyo opens. Tokyo stays open until London is
open. So during the week, there’s always one of these open. So starting on
Sunday, Sunday night Eastern Time, Sydney is the first one to open at 1700,
which is 5:00 PM Eastern Time. So it stays open. Then Tokyo opens. Then
London opens. Then New York opens.

They all trade throughout the week. Then finally, come Friday, New York is
the last one to close at 5:00 PM Eastern Time. So 24 hours a day, from 5:00
PM Sunday to 5:00 PM Friday.

So we can see these different markets open, the different times that they
trade. Let’s just keep that up there for now. So if you’re day trading, you
want to trade in pairs where at least one or two of those markets in the
pair is open. For example, the Euro/USD, when either London or New York is
open, that’s when you want to trade. So we can see here, London opens here.
So this is when you can start trading the Euro/USD, and you can trade it
through until the end of the New York session.

When both these markets are open, in this section here, you’re going to
have a lot of volatility and a lot of volume because you have two big
markets trading that pair. Outside of that timeframe, so when Sydney is
open, Tokyo is open, you’re probably not going to have as much volatility
or trade-worthy moves in the Euro/USD because none of those . . . The
markets that really trade that pair aren’t open.

So another example is the USD/JPY. So that’s the New York US dollar and
Tokyo, which is the yen. So these are open at different times. So the
USD/JPY, you’re probably going to want to trade while New York is open or
Tokyo is open. During these dead times in between when those markets are
open, it’s likely to be very quiet.

We can see this at Vantagepointtrading.com/dailyforexstats. Up there, you
can quickly see volatility studies. So here is the Euro/USD. We can see
this is in Greenwich Mean Time. When both those markets are open, we see a
lot more volatility. So this is the number of pips that we’re moving in
terms of . . . This is hour of the day.

So when these markets aren’t open, very low volatility, very low volume as
well. So we’re going to mostly want to trade, if we’re day trading during
this time here, which is when those markets are open. The USD/JPY, we’ll
see a little bit different. It’s more volatile when US is open, a little
bit more when Japan is open, and kind of tails off when those markets
aren’t open.

So we’re going to want to focus on day trading when the markets within our
pair are open. If we’re swing trading or taking trades that last more than
a day or so, then it doesn’t matter as much. We can take positions just
whenever we see them. But for day trading, we’re going to want to focus our
efforts on pairs that have a market open, because there is just going to be
more movement, more volume.

So those are those three concepts. They’re important to understand. Go over
them if you’re still unfamiliar. Watch the video again. Play around in
MetaTrader to get used to looking at what the swap is, the spreads, and get
used to the market hours. Until next time, happy trading.

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