Islamic Account: Forex Brokers' Best Solution to Swap-Free Trading

Islamic account is not only beneficial for Muslims but also for all traders who want to avoid the risk of an extra trading cost from swap rate.

Have you ever come across the term "Swap-Free Account" while you were browsing forex brokers' specifications? Even though it is often referred to as a type of trading account, swap-free is not the same as the standard or micro accounts that offer minimum lot-based trading.

What is a Swap?

In forex trading, swap (or sometimes referred to as rollover) is the interest charged for overnight trading positions. The amount is calculated from the difference in interest between two currencies of a traded pair. So if you trade EUR/USD, the swap rate is the difference between the current interest rates of the Eurozone and the US.

It is essential to know that the interest rate calculation can differ based on your order, in which buy and sell can have different outcomes of swap rate. That is why the swap system in forex trading is not always seen as interest, but also a burden in the trading cost if the difference is negative. And so, we will further discuss the mechanism of swap accounts in this article.

The Swap-free Account

A swap-free account is also known as an Islamic account because brokers initially made this account specifically for Muslims. The main reason is that Shariah law forbids its followers to earn interest from trading, and swap can be seen as a form of usury. Therefore, many Muslims use this type of account to avoid earning swaps. If a broker wants to expand its clients' demographics, developing this swap-free account can be very beneficial.

Like its name, swap-free means free of swap and could eliminate the risks of earning swaps. But while this account was initially made for Muslims, many brokers also provide this facility for Non-Muslim traders. Why is that?

Apparently, many traders are interested in trading without the complexity of the swap system. They usually want to eliminate the risks of swaps that can arise overnight. This kind of trader usually doesn't use the Carry Trade strategy that purposefully searches for swap interests. Suppose they implement the swing strategy or trading in a 4-hour chart or higher, the risk of holding a position for more than a day is indeed relatively high, and they usually don't want to add swap rates as the trading cost that they need to calculate.

For example, if a trader buys GBP/USD but the swap that applies to that position has a negative value, he will be more interested in trading the signal than the swap. In that situation, swap becomes the extra commission that he needs to pay when he is already charged with the spread and/or commission.

As traders will still have to take into account the risk of negative swaps in their risk management, it is only normal for them to avoid the swap rate and trade in a swap-free account.

See also: Negative Balance in Forex Trading Account

What you need to know is that the swap-free label is not only limited to particular types of accounts from the broker. Regular trading such as standard, mini, micro, cent, and others can also be called swap-free if the broker adds swap-free features in each of the accounts. Here are the most common rules that brokers use in their swap-free accounts:

1. Islamic Traders Only

In this type of account, forex brokers specifically provide swap-free features for Muslims. To make sure of the trader's identity, brokers will add extra procedures and unique verification process. Some of the brokers that provide this kind of swap-free account are JustForex, IC Markets, Exness, FXOptimax, HotForex, and XM.

2. The Maximum Duration of Position

Sometimes, a swap-free account does not always free from the risk of rollover. The swap-free account has an expiration date in some brokers, which varies from three to more than ten days in total. FXPrimus is one of the brokers that use this limitation. This broker will set a commission for trading positions that are opened for more than a week. FxPro is also known for this kind of policy.

3. The Commission

Free from swap doesn't guarantee that traders will be free from the overnight commission. In reality, some brokers charge fees, perhaps as a swap rate replacement so they don't have to cover the negative rates. One of them is Alpari, which charges a fixed fee in a swap-free account. It is not mentioned as the difference in interest rates but rather the type of pair and the number of trading lots.

On the other hand, Forex.com charges a $2.50 flat rate per Mini lot or $25 per standard lot for overnight positions. One certain thing that they have in common: the amount of commission charged is fixed and doesn't follow the dynamics of interest rates.

4. Special Trading Conditions

This policy is most commonly found among swap-free accounts provided by forex brokers. In this policy, swap-free is not only positioned as an extra feature in regular accounts but has become a special trading account with its own specifications.

If you register in a broker that provides a swap-free account as a particular type of account, then make sure you observe and pay attention to its terms and conditions, and make sure that they are not in contrast with your trading conditions. Some of the brokers that use this policy are Tickmill, GKFX Prime, and Grand Capital.

Other than the four rules stated above, many other policies can be applied by a forex broker specifically. For example, FXTM doesn't provide swap-free for exotic pair trading, ThinkMarkets does a particular monitoring method to prevent abuses (especially by scalpers), and many more. For more details and the complete list of forex brokers offering swap-free trading, visit this page.

Most importantly, in choosing a broker, make sure to understand every policy in their swap-free account and find the one that suits your needs. Do not hesitate to turn one down and find another because a swap-free account is already quite common among brokers. You won't run out of choices of a good forex broker with an ideal swap-free trading condition.

If you find yourself in a dilemma because your ideal forex broker turns out doesn't have a good swap-free policy, you can always minimize the trading cost from the other perspective: the spread. This list may provide you with the lowest major pairs' spreads you ever found in forex brokers.