You may have heard the term Islamic Forex account before, but what is it? The Islamic Forex account is one of the important tools in Forex that some traders cannot do without because this account protects you from overnight losses. If you leave the trade open for the next day, the overnight swap will not apply to you.
Everything you need to know about the Islamic Forex account
1 – What is an Islamic Forex Account?
The Islamic forex account, or what is called Swap Free, is a feature in trading accounts. If you activate it to Swap Free, no commission will be added to you for the overnight positions if you want to leave the trade for the next day. After the New York session closes, if you do not activate this option, a commission will be added to you from the broker for the overnight Trades.
This feature is very good for traders as they will not lose more unaccounted money because the commission added for the overnight trades is variable and not fixed.
The Islamic forex account is originally a feature that was added based on Sharia Law, as it is forbidden in Sharia Law to impose an overnight commission on open trades
The Role of Sharia Law in Forex Trading
In principle, Sharia law does not require any commission to be added to trades that are left until the next day, because this commission is considered Usury (Riba) in Islam. Usury is any interest or any increase in the money borrowed or paid in financial transactions, and usury is forbidden by Sharia law.
Because Brokers respect these laws and Islamic law, they have allocated accounts that suit Islamic law and Muslims, as they have added the feature of an Islamic forex account to avoid adding the overnight commission.
2 – Key Benefits of an Islamic Forex Account
Key Benefits of an Islamic Forex Account
How can an Islamic forex account benefit you? Of course, there are many benefits if you activate an Islamic forex account, the most important of which is that your account will be swap-free, meaning that no Fees or commission will be applied to your account.
There will be more flexibility in managing your trades, and this is very important because if there is an overnight commission added to your account every day, you will incur unexpected losses and you may exit the trade with a loss, not a profit.
Risk management
Risk management is an integral part of any trading strategy or plan. If this plan has some flaws, the trader may lose a large part of his account or his entire account. right? Therefore, activating the swap-free is important for Risk management because if an additional commission is added to the trade, you will face some difficulties in closing the trade with the profit you want.
The commission added to the trade is not large, it will not make you lose, of course, but the accumulation of this commission is the problem because if the trade is left for more than a week or a month, you will be surprised that there is a large commission added to the trade that may exceed the profit you achieved.
In this case, if the trade reaches the take profit, you will find that it has not made profits and may make losses. The Islamic forex account protects your account from such situations so that you do not incur losses greater than you can bear.
Is an Islamic account beneficial or harmful to traders?
We can say that the Islamic forex account has no disadvantages. It is certainly in the trader’s favor because it protects you from usurious (Riba) swaps from overnighting trade, but it is not necessary for these swap to be negative. It is possible to obtain profits by overnighting trade.
The swap added to the account can be positive or negative based on the interest rate of the currency. For example, if you buy a currency that has a higher interest rate than the currency you sold, you will get a positive swap.
For example, if you want to buy the EUR/USD, if the interest on the euro is higher than the dollar, you will get a positive overnight swap, but currently, the interest on the dollar is the highest, which is 5.5%, and in this case, negative swap will be added to the trade.
But these Fees will still be considered usurious (Riba) swap and there is no difference whether the swap is positive or negative, as it is considered religiously forbidden in Islamic law.
Factors affecting the interest rate of a currency
Many factors affect the interest rate, and if your account is not Islamic, you must, before trading in the currency you want, see whether the currency has a high interest rate or not, so that you are not surprised by a negative commission instead of a positive one.
CPI
Inflation plays an important role in influencing the decision of interest rates, whether to rise or fall. If inflation rates are increasing, this will lead to an increase in interest rates. If you follow inflation decisions on news sites that have an economic calendar, you can find out through this decision whether the central bank will increase interest rates or not.
interest rate forex factory
Central Bank Policy
The central bank policy is very important in determining interest rates. If the plan it is following is good, it will follow the increase or stability of the interest rates that it has previously determined. That is, you will find the expected result on the Economic calendar that is happening. However, if there is a dire need to increase interest rates because inflation rates are increasing significantly, the central bank will change the plan it was following to a sudden increase in interest rates. Thus, you will decide to buy the currency with the high interest rate in order to get a commission & make profits.
Swap-off policy for each broker
Each broker has its policy in case you want to get a swap (Swap off) for your trade, and this policy differs from one broker to another.
For example, some brokers may offer a very small positive swap compared to a negative swap in order to ensure that they will not lose if many traders buy the currency with a high interest. This is somewhat logical because the broker sets strict conditions in order to protect himself from loss, and these conditions keep him in the market for the long term.
Double Swap over time, The swap imposed on you by the broker may be doubled over the days, depending on the policy of each broker. It is best to read the terms and conditions of each broker carefully before joining it because if you leave the trade for several days, you will be surprised by a big loss in the account.
Lot size, The size of the trade that you will open will certainly determine the amount of swap that will be added to the account, so you must choose a lot size that is appropriate for your capital so that a high swap is not added to you.
Market Conditions, Market volatility greatly affects the swap you will receive or the swap that will be deducted from your account. If there are violent fluctuations in the market, high fees will be imposed on the trade, and vice versa. If there is no volatility, normal fees will be added.
Swap-on policy
If you use Swap Free, no swap fees will be charged for the trade, but for how long? Can you leave the trade open for months and years without adding swap fees to the trade?
In fact, this matter differs from one broker to another because the policies of each broker are different from the other. The broker may allow you to leave the trade as you wish and will not add any overnight commission to the trade, but there are brokers who set a maximum limit for the days of the trade. for example 14 days or a month, and after this period you will be surprised by the addition of overnight fees to the trade even though you have activated the Islamic account (Swap on). Therefore, you must read the policy of each broker carefully before you open any trading account.
3 – How to Open an Islamic Forex Account
Activating the Islamic forex account is very easy, but the steps may differ from one broker to another, but they are similar. There are some brokers that activate the Islamic account automatically without the need to activate it, and there are others that you need to activate yourself and choose Swap on.
Choose the broker
Choosing the right broker is very important. Because Not all brokers have Islamic forex accounts. Before you open an account with any broker and deposit, you must first make sure whether it offers an Islamic account or not.
Choose the suitable account for you
After choosing the broker, it is time to open a new account. The broker will ask you whether you want to activate the Islamic Forex account or not. When opening the account, you must activate this option Swap-Free so that Fees are not added to the trade.
Swap Free
If you cannot find the option to activate the Islamic Forex account, ask technical support first because the Islamic Forex account may be activated automatically when opening the account, or the broker does not offer Islamic accounts.
4 – Potential Drawbacks of Islamic Forex account
Some brokers may add some conditions in the event of activating the Islamic account in order to compensate for the profits that were supposed to be earned in the event that the rollover fees were applied. Among these conditions are:
Higher Spreads & Commission
Some brokers may increase the spread and commission in Islamic forex accounts compared to regular accounts (Swap off).
Reduced Access to Certain Features
If your account is Islamic, there may be some restrictions in trading. For example, you may notice the absence of some commodities or CFDs on the MT4 or MT5 platform, but if you only trade the major Forex pairs, this will not be an obstacle for you.
Reduce leverage
The broker may reduce the leverage if Swap Free is enabled, but if the leverage is suitable for you, you will not need a higher leverage to trade.
5 – How to protect yourself from swap
If you want to protect yourself from Swap, you can simply activate Swap Free, but Swap is not necessarily harmful to your account. There are strategies that depend on the commission that the trader gets by keeping the trade until the next day, You may benefit from a lower spread and lower commission if Swap Free is not activated.
But this, of course, will be contrary to Islamic law and this Swap that will be added to your account will be considered an usurious commission, so the best thing is to activate the Islamic forex account (Swap on).
Conclusion
The Islamic Forex account is very important in the Forex market because the commission that is added when the trade is rolled over to the next day is forbidden by Islamic law. Since brokers are aware of this, they have added the Islamic forex account feature, but activating this feature may have some consequences, including a slight increase in the spread and commission on the accounts. It is also possible that some products on the platform, such as CFDs or some commodities and cryptocurrencies, may not be available.
