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.
Contents
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.
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.
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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.
5 Comments
Maya
Jan 19 2023
I understand that swap-free accounts do not charge a swap rate or rollover fee for each position opened overnight. However, considering the fees, why swap-free accounts are more burdensome than rollover fees. Does it appear to be Ok, in some cases you can make a profit on the price, but you will also be debited if the price is negative. For example, the commission is $2.5 for every 0.1 lot you open on forex.com. If you open 4 positions, you will be charged $10, right? Which has lower fees, Swap Free or Swap Rate?
Jorge
Jan 19 2023
Maya: In my opinion swap rate and swap free accounts are for swing traders and experienced traders.Because if you trade intraday trading which is scalping and one day trading you don't have to pay for swaps and Halal" or because it is allowed for Muslim traders.
But if you've talked about fees, the swap rate is actually the bigger fees. On Wednesday, swaps rate that broker charged will be three times as it takes two days for the broker to process the forex entry to be settled. So, if you have an entry trade during Wednesday and the entry is left overnight, you can only close on Friday.
Diego Mendez
Jan 19 2023
Dude, what are the other fees that may be incurred when trading Forex. Seems like a lot of fees are charged to the seller. I mean, the trader paid the spread, commission, sometimes deposit and withdrawal fees. And now need to pay the swap fee. Also don't forget taxes. Are there any fees I have to pay in forex trading? So many fees and need very good counting in that. Why forex need so many fees that broker charge to us?
Forex seems to be very profitable, but after seeing the variety of fees, I think you need to reconsider Forex trading.
Joshua Nathan
Jan 19 2023
Diego Mendez: Sir, if you want to trade Forex with real and real market, you need to prepare your money management. I think money management is the most basic thing of Forex. You need to calculate all possible fees, margin, number of trades you can trade, avoid overtrading, risk reward, log preparation, etc.
A lot of preparation is required before starting forex trading. After money management, you can also learn more about trading strategies, do some testing on a demo account and then you can trade real forex.
You can read these articles in order to get tips in Forex trading and know all fees that may be occured during Forex trading:
About your question : why there are so many fees in Forex? We need to know first that we cannot enter the Forex market if our money is only 1000$; 10,000 USD; even $100,000. Forex trading really requires huge amount of money which only hedge fund companies, central banks and large corporations can participate. But with the help of brokers we can participate because they offer many services include sending our order to the market and give us leverage. So, for feedback they charge every trade we open to get profit and money for their operation.
Diego Mendez
Jan 19 2023
Joshua Nathan: That's a lot explanation, yeah as you have said, money management is very important to forex trading. i will considered to enter the forex or not because I am not too great at money management. But thanks for the article that you give, I am little bit understand about forex money management.