You need to understand Swap in trading: From theory to practical application

In the world of trading various assets, most traders tend to think that costs are limited to the Spread (price difference) and Commission (commission) only. However, there is a much larger cost often overlooked: Swap, which is a crucial factor that can significantly alter your trading outcomes.

What is Swap: The Reality Behind

Swap is essentially the fee for holding a trading (Position) overnight. In finance, it’s called “Overnight Interest” or “Rollover Fee.” Simply put, it’s the interest accrued from maintaining an open trade order beyond market hours.

When you trade Forex currency pairs, such as EUR/USD, you are actually “borrowing” one currency to “buy” another:

• If you Buy EUR/USD: You are buying EUR and borrowing USD to pay for it.
• If you Sell EUR/USD: You are borrowing EUR and holding USD.

Each currency has its own interest rate set by its central bank (Fed for USD, ECB for EUR, etc.). Therefore:

• The currency you borrow → you pay interest
• The currency you hold → you receive interest

Swap is the net difference between these two interest rates.

Basic Calculation Example

Suppose EUR interest rate = 4.0% per year, USD interest rate = 5.0% per year:

Buy EUR/USD → Earn EUR 4.0%, Pay USD 5.0% → Swap = -1.0% per year

Sell EUR/USD → Pay EUR 4.0%, Earn USD 5.0% → Swap = +1.0% per year

However, in reality, the broker (the lender for this borrowing) often adds their own management fee, so the Swap you receive may differ from the theoretical rate.

Types of Swap You May Encounter

1. Positive and Negative Swap

Positive Swap (+): You receive money credited to your account when the interest you earn exceeds what you pay (minus broker fees)

Negative Swap (-): You pay money from your account when the interest you owe exceeds what you earn. This is the more common scenario.

2. Long Swap vs. Short Swap

Brokers specify different Swap rates for each trading direction:

• Long Swap (Buy): When you open a Long Position
• Short Swap (Sell): When you open a Short Position

These rates are often not equal from the start, due to the broker’s profit margin.

3. The 3-Day Swap Phenomenon (“Swap 3x”)

This is a key point many traders overlook.

Why: The Forex market is closed on Saturday-Sunday, but interest rates do not stop—they run 7 days a week.

Brokers must aggregate the Swap charges for Saturday-Sunday into a weekday:

• Mostly on Wednesday night to Thursday (for technical reasons: Forex Settlement T+2)
• Therefore, the Swap becomes 3 times the normal rate.

How to Find Swap Rates on Trading Platforms

On MT4/MT5 (Standard systems)

1. Market Watch → Right-click on the asset
2. Select “Specification”
3. Look for Swap Long and Swap Short
4. Values are shown in Points (to be converted) or % per year

On other platforms

Modern trading providers often display “Overnight Fee” clearly and simply, expressed as a % per night (e.g., -0.008% per night)

How to Calculate Swap Costs Accurately

Method 1: From Points Units (MT4/MT5)

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

Example:

• Buy 1 Lot EUR/USD
• Swap Long = -8.5 Points
• EUR/USD: 1 Pip (10 Points) = $10, so 1 Point = $1
• Swap = -8.5 × $1 = -$8.50 per night
• For a 3-Day Swap: -$8.50 × 3 = -$25.50

Method 2: From nightly percentage rate

Formula: Swap (Money) = (Full position value) × (Swap rate %)

Example:

• Buy 1 Lot EUR/USD (100,000 units)
• Price EUR/USD = 1.0900
• Swap rate = -0.008% per night

Steps:

1. Total value = 1 × 100,000 × 1.0900 = 109,000 USD
2. Swap = 109,000 × (-0.008/100) = -$8.72 per night
3. For 3-Day Swap: -$8.72 × 3 = -$26.16

Important: Swap is calculated from the full value (109,000 USD), not from your Margin.

If you leverage 1:100, you might only put up 1,090 USD Margin but pay Swap of 8.72 USD, which is about 0.8% of your Margin per night. This is why Swap can be dangerous when trading with high leverage and sideways markets.

Opportunities and Risks: Both Sides

Risks

1. Profit eaten by Swap You might make a 30 USD profit but pay 26 USD in Swap (if the 3 nights with 3-Day Swap), your net profit is only 4 USD—hardly worth it.

2. Holding position pressure In sideways markets, paying negative Swap daily results in slow losses. Many traders can’t endure and close their positions, even if their original plan was longer.

3. Increased danger with leverage High Swap relative to Margin increases the risk of Margin Calls.

Opportunities

1. Carry Trade Strategy

Leverage the interest rate differential by choosing a Long Swap positive currency pair, borrowing a low-interest currency (JPY, CHF), and buying a high-interest currency (AUD, NZD, TRY, MXN) during certain periods.

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

Risk: Exchange rate risk—if AUD/JPY drops sharply, the exchange loss could outweigh years of Swap gains.

2. Swap-Free (Islamic Account)

For Muslim traders, these accounts do not charge Swap regardless of how long you hold the order.

Trade-off: They may have wider spreads or fixed management fees after holding for more than 3-7 days.

Planning Your Trading Carefully

Knowing the Swap rate before entering a trade is crucial for:

• Scalpers: Not much concern, close trades quickly, mostly no overnight holds.
• Swing Traders: Need to consider it carefully, possibly choose Long positions with positive Swap or use Swap-Free accounts.
• Position Traders: Most risky, require close monitoring of prices and calculating Swap impact on long-term trades.

In Short

Swap is not just a trivial fee; it’s a hidden cost that significantly impacts trading. Swap is calculated from the full value of the position, not just your Margin, which can have a big effect when using leverage.

Understanding how it works, calculating it step-by-step, and choosing strategies aligned with your trading style will help prevent this hidden cost from eating into your profits.