What is Swap and why should traders care?

Question

When you start your journey in trading, you’ll encounter many costs. Some are obvious, such as Spread or Commission, but there are hidden costs that are often overlooked, especially among beginner traders. That is Swap.

Understanding Swap will help you trade wisely and avoid unknowingly eating into your profits.

Swap Basics: Where Does the Cost Come From?

Swap is a fee charged when you hold a trading position overnight. It can be called “overnight interest” or “rollover fee.”

At its core, Swap is the difference between the interest rates of the two currencies in the trading pair or the holding costs of other assets.

Why does Swap exist?

When you open a trade order, you are “borrowing” one currency or asset to “buy” another. For example:

Trade Buy EUR/USD: You buy EUR and borrow USD
Trade Sell EUR/USD: You borrow EUR and buy USD

Each currency has its own policy interest rate. Euro (EUR) might have an interest rate of 4.0% per year, while US dollar (USD) is at 5.0% per year.

The difference between these interest rates is the Swap you will pay or receive.

Example calculation of Swap

Suppose EUR interest rate is 4.0% and USD is 5.0%:

Buy EUR/USD: You earn EUR interest (4.0%) but pay USD interest (5.0%) = difference -1.0% (per year) → Negative Swap
Sell EUR/USD: You pay EUR interest (4.0%) but receive USD interest (5.0%) = difference +1.0% (per year) → Positive Swap

However, brokers add their own management fee, so the actual Swap you get may differ from the theoretical calculation.

Swap in Different Markets

The concept of Swap is not limited to Forex:

Swap for Stocks and Indices (Stocks/Indices)

Swap is calculated based on the interest rates of the currencies involved in the asset. For example, US stocks are based on USD interest rates.

Swap for Commodities (Commodities)

Assets like gold and oil are calculated based on storage costs or rollover costs of futures contracts.

Swap for Cryptocurrencies (Crypto)

Generally, it is based on the market’s Funding Rate, which is highly volatile.

Types of Swap and Their Characteristics

Swap Positive

Occurs when you receive money into your portfolio for holding overnight, happening when the interest rate of the asset you buy is higher than that of the borrowed asset.

Swap Negative

The most common situation: you have to pay money out of your portfolio every night, occurring when the interest rate of the asset you buy is lower than that of the borrowed asset.

Swap Long and Swap Short

Swap Long: Swap rate for Buy orders
Swap Short: Swap rate for Sell orders

Both sides are often not equal because brokers add different fees.

3-Day Swap: A phenomenon traders need to know

This is a point many traders overlook. Normally, Swap is calculated once per day, but there is one day in the week when you are charged 3x Swap (3x).

Why?

The Forex market closes from Saturday to Sunday, but interest in the financial system continues daily. Brokers must aggregate the Swap for Saturday and Sunday into a single trading day.

This usually happens on Wednesday night (for positions held from Wednesday to Thursday) because the Forex market settlement cycle is T+2.

Viewing Swap on Trading Platforms

On MT4/MT5

Open the Market Watch window
Right-click on the asset
Select Specification
Look for Swap Long and Swap Short (displayed as Points)

On Modern Trading Platforms

Modern platforms often display Swap information as a percentage (%) per night, making it easier to calculate.

How to Calculate Swap Costs

Method 1: From Points (MT4/MT5)

Formula: Swap (in money) = (Swap Rate in Points) × (Value of 1 Point)

Example:

Trading Buy 1 Lot EUR/USD
Swap Long = -8.5 Points
For EUR/USD, 1 Lot, 1 Point = $1 USD$1
Swap = -8.5 × ###= -$8.50 USD per night
For a 3-Day Swap: -$8.50 × 3 = -$25.50 USD

( Method 2: From Percentage )%(

Formula: Swap )in money( = )Total position value( × )Swap rate %(

Example:

Trading Buy 1 Lot EUR/USD at 1.0900
Overnight fee )Buy( = -0.008%
Total value: 1 × 100,000 × 1.0900 = 109,000 USD
Swap: 109,000 × )-0.008% / 100### = -$8.72 USD per night
For a 3-Day Swap: -$8.72 × 3 = -$26.16 USD

Important point: Swap is calculated based on full position value

Swap is calculated from the total position value, not from the Margin you put up. For example, if you use 1:100 leverage, you might only put up 1,090 USD in Margin but pay Swap based on 109,000 USD.

This means that if the market is flat, Swap can quickly eat into your Margin, even if prices hardly move.

Risks of Swap

Profit Erosion

You might make a profit of 30 USD, but if you hold overnight for 3 days, your profit could be wiped out by a -26 USD Swap.

Forced Position Closure

In a stagnant market, holding a position with Negative Swap causes slow losses every day. Many traders can’t tolerate this and close their positions before reaching their target.

Leverage Risk

The risk of Margin Calls increases if the market moves against you, as Swap continuously eats into your Margin.

Opportunities from Swap

( Carry Trade Strategy A classic strategy that benefits from Positive Swap:

Borrow low-interest currencies )like JPY(
Buy high-interest currencies )like AUD###
Receive positive Swap daily for holding the position

Example: Open a Buy AUD/JPY to earn positive Swap every night.

Risk: The AUD/JPY price might drop, causing losses from exchange rate movements that outweigh the accumulated Swap gains.

( Swap-Free Account )Islamic Account For traders who want to hold positions long-term, Swap-Free accounts offer a solution:

No Swap charges regardless of how long you hold
Suitable for Swing Traders and Position Traders
Brokers may compensate through wider Spreads or fixed management fees

Summary for Smart Trading

Swap is not just a floating fee; it is a cost with an underlying structure, and its impact varies depending on your trading style:

Scalpers: Minimal impact, as they close orders within minutes
Swing Traders: Need to consider Swap in planning
Position Traders: Should choose to trade the side with Positive Swap or use Swap-Free accounts

A deep understanding of Swap will help you estimate costs accurately and make informed trading decisions without surprising hidden costs.

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