Forex Brokers Enhance Their Offerings with Swap-Free Accounts
Forex trading has become popular the world over but for traders with strong religious beliefs, certain peculiarities need to be observed. Shariah law, for example, prohibits Muslims from earning interest. When rollover/swap payments are paid on positions held overnight, it can be a problem.
To overcome this difficulty, and to ensure that possible Muslim Forex traders were not left out of the equation, brokers came up with swap-free or Islamic accounts. No interest is paid on overnight positions, but there are sometimes additional account fees. The fees can vary, depending on individual brokers. However, this could be considered a swap-free account in disguise. After all, an interest charge transferred to a different type of fee is still a charge that covers interest, which is against Shariah law.
Some brokers offer extra perks for swap-free accounts. Enabling Muslim clients to donate a share of any profit to charity.
What are swaps in Forex trading?
A Forex swap rate is the overnight or rollover interest, either earned or paid, for positions held overnight. A swap charge is based on the individual country interest rates of those involved in each currency pair being traded, and whether the position is long or short. Interest is paid on the currency being sold, and received on the currency being bought. Swap charges are usually based on risk management analysis and market conditions.
It seems that Forex trading has become so very popular around the world, that the types of account and tools available are always changing. Technology has enabled anyone, anywhere, and of all different religious persuasions to invest their hard earned cash, and enjoy watching the world markets, developing new strategies, and increasing the possibility of making pots of cash.
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Forex trading and the beliefs of Islam
Forex trading and its prohibition in Islam is a very controversial subject. There are many people with very differing views, about the many aspects of Forex trading including futures, options, spot, and margin trading, as well as overnight interest. Many agree that Forex trading can comply with Shariah law, only if it is spot trading, and no overnight interest is involved. And that includes interest hidden by commissions.
The main bone of contention seems to lie with margin trading (as almost all Forex is based on margin trading), and hedging (often compared to futures trading). A well grounded article has been written by Dr. Mohammed Obaidullah, of the Universiti Tun Abdul Razak in Malaysia, and is often cited by experts. The article covers all aspects of Forex trading and gives references to the fundamental Islamic sources. Dr Mohammed Obaidullah gives a very good argument for Forex trading to be legal for Muslims. Provided no Riba (interest) is involved.
What are the options for an Islamic Forex trader?
There are a number of Forex brokers who offer Islamic, No Riba, Shariah, or Swap-Free accounts, but before signing up with any of them it is important that you analyze the issues and make your own choice about whether Forex trading is allowed. Not everyone agrees with the beliefs of Dr. Mohammed, and after a thorough review of the issue you may not come out on his side.
Once you are sure in your own mind that your religious beliefs can be accommodated in your Forex trading adventure you will have to find a broker that meets your needs. It is also important for the broker to be regulated, and respected in the industry, as well as by other traders. Islamic accounts are very unique and won’t be the right choice for everyone, because there are restrictions and different pricing structures. However, they do give Muslims a way to trade currencies, and take into account their religious beliefs.
The restrictions were introduced after unscrupulous traders tried to take advantage by using a combination of Islamic and regular accounts. They did this by using the pricing differences employed by the brokers in hand. Brokers nowadays, tend to keep a good look out for this kind of activity and have been known to shut down offending accounts.
Why Forex trading is so popular
- Market hours are the most flexible of any financial market
- Investing in Forex offers some of the best risk/reward opportunities
- The Forex market has a huge trading volume, which means there is a high level of liquidity
- It’s not possible for anyone to corner the market
- Start up costs are minimal in terms of money and time
- Using leverage means traders can take advantage of the tiniest move in the rates of exchange
- A steady income can be earned through rollovers/swaps, unless it is against religious beliefs of course
- To help new traders there are demo accounts, analysis, charts and news
However we should point out that using leverage as part of your trading strategy means you are putting yourself at risk of losing everything, or at the very least a large portion.