What is an Islamic account in forex?
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When you look at the account types of most brokers, you’ll see there is an Islamic account.
But what is an Islamic account, and how can you open one? In this guide, we’ll break down the Islamic forex account, some of its basic features, and how you can open it.
Forex Islamic account explained
An Islamic FX account is a halal trading account available to clients who want to invest according to Islamic financial principles.
Islamic trading accounts, often known as swap-free accounts, vary from normal FX accounts in numerous respects. For example, traders with Islamic accounts do not pay or earn interest rates since Sharia law bans interest accrual.
Furthermore, transactions in Islamic finance accounts must be completed as quickly as possible, which means that currencies must be moved from one account to another as soon as possible, and transaction charges must be paid simultaneously.
Payment of different fees in the form of interests, such as rollover fees, is an important element of forex trading. All of these charges are waived for Islamic FX accounts.
The need for an Islamic account
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There is a debate among scholars that are forex trading accounts acceptable in Islam. By definition, forex trading is halal and does not contradict Islamic finance’s core principles.
However, forex trading is becoming more accessible every day, and the promise for rapid riches is luring more traders in. Because it’s only about buying and selling money, it appears to be a halal investment option at first look.
It is a halal transaction, for example, to buy the Euro against the Dollar and sell later when the Euro has risen against the Dollar. Sharia law, or Islamic law, forbids providing or receiving interest in any form.
This restriction stems from the notion that devout Muslims should contribute only for the sake of giving, not to receive something in return. That is why Islamic FX accounts with no interest were developed.
The concept of forex riba
When a trader keeps open positions after the trading session ends, the broker often charges a swap commission, equivalent to an interest rate.
The idea that the broker provides you with an indirect loan through leverage is connected to this interest rate. As with any loan, it is natural for the lender, who in this case is the broker, to profit from it.
As a result, a normal trading account is haram because it requires interest costs, but an Islamic trading account is halal since it does not need the payment of swap interests.
In reality, it is permissible in Islam to borrow money from someone to invest for profit and then repay the creditor with no interest.
Instead of charging fees and commissions to stay profitable, the broker charges fees and commissions, which some may consider a hidden interest. However, do many academics support this approach of facilitating trade? As a result, an Islamic trading account without swaps can get over the riba barrier.
How can you open a forex Islamic account?
To open an Islamic forex account, you need to register with the broker of your choice and provide the necessary docs.
Like any other account, make sure you are opening an account with a reliable broker. You have to dig deeper and understand all the peculiarities before opening an account.
What are some of the strategies you can apply to an Islamic account?
You can apply several strategies to the Islamic forex account. Here are a few of them:
1. Day trading
Day trading is a common trading method in which you purchase and sell a financial instrument over a single trading day to profit from tiny price fluctuations.
Day trading is a type of short-term trading where, unlike scalping, you only take one transaction each day and close it out when the day is over.
So, an Islamic account is beneficial for day trading, as you go in and out of the trades within a day, and you don’t have to pay any commissions.
2. Scalping
Forex scalping is a trading strategy in which forex traders purchase or sell currency pairs with a short holding period to generate rapid profits.
A forex scalper seeks to make many trades to profit from minor price fluctuations that often occur throughout the day. While scalping aims to capture modest profits for each trade, such as 5 to 20 pips, the profit on these trades may climb up by raising the position size.
3. Swing trading
Swing trading is a type of trading whose goal is to achieve short- to medium-term gains spanning a few days to several weeks. Swing trading’s aim is to profit from a portion of a possible price change.
4. Position trading
Position trading is a long-term trading style in which a trader holds a position for several months or years. Position trading differs from day trading in that it does not involve traders actively observing the market.
Pros of forex Islamic account
- The primary distinction between Islamic and basic accounts is that swap commissions don’t apply. It can be a significant benefit since you can initiate long-term trades without the danger of losing money owing to exchange commissions.
- The second major benefit is that the trader will open positions in currency pairings with very high swap fees (especially in exotic pairs).
Cons of forex Islamic account
- The lack of a swap can also be harmful to halal forex traders since they will be unable to benefit from the positive interest payments frequently provided on short positions and the advantages of carrying trading techniques.
- To be profitable once interest vanishes, non-swap brokers frequently charge a set administration fee, similar to what banks do in Islamic financing.
Bottom line
Forex Islamic accounts aren’t for everyone, but if you’re a trader who likes to roll over open positions to the following trading day, you’ll love them. You can keep your trades open overnight without paying rollover fees if you use an Islamic account.
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Heinrich is a forex and CFD enthusiast with a passion for writing good informative quality content. He strives to showcase the best forex brokers in Africa. Join him on his Journey!
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