What is Swap in Forex and why do traders need to pay attention to it?

Hidden Costs Often Overlooked

When discussing trading costs, most investors think of spreads and commissions. However, there is another hidden cost often ignored, especially by beginner traders: the Swap. It may be a small amount per night, but when accumulated over time, it can quietly eat into profits.

What is Swap?

Swap (or called in financial language “Overnight Interest” or “Rollover Fee”) is the fee for holding a position overnight. Simply put, it is the interest incurred when traders keep an order beyond the market’s trading hours.

The term “Swap” comes from the concept of exchanging or, more precisely, exchanging assets to benefit from interest rate differentials.

What is the true origin of Swap?

In Forex trading, the origin of Swap is more complex than it seems because it involves the “Interest Rate Differential” (Interest Rate Differential) between two currencies.

When traders open a Forex order such as EUR/USD, they are simultaneously borrowing and lending currencies:

• Buy EUR/USD: Buy EUR and sell (borrow) USD
• Sell EUR/USD: Sell (borrow) EUR and buy (hold) USD

Each major currency has its own monetary policy rate. The Euro (EUR) is under ECB, and the US dollar (USD) is under the FED. When traders borrow a currency, they pay interest for that currency. When holding a currency, they should earn interest from it.

Calculation example: If EUR interest rate is 4.0% per year and USD interest rate is 5.0% per year:

• Buy EUR/USD: Earn 4.0% from EUR but pay 5.0% for USD = -1.0% (must pay Swap)
• Sell EUR/USD: Pay 4.0% for EUR but earn 5.0% from USD = +1.0% (receive Swap)

Why do most traders have to pay Swap?

In practice, brokers (Broker) act as intermediaries facilitating this borrowing. They add their own management fee (“spread”) into the actual Swap rate.

Therefore, although theoretically Swap should be positive or negative depending on the interest rate differential, in reality:

• Long Swap (Buy) is often negative
• Short Swap (Sell) can sometimes be positive or negative

This explains why Long Swap and Short Swap are not exactly the same.

Types of Swap

Positive Swap (Positive Swap): When the interest of the purchased asset is higher than that of the borrowed asset, traders receive money into their portfolio every night they hold the order.

Negative Swap (Negative Swap): When the interest rates differ in the opposite direction, traders must pay money out of their portfolio every night, which is the most common scenario.

3-Day Swap: A common oversight by traders

There is an interesting aspect of Swap calculation: it is usually calculated once per day, but there is one day in the week where it is tripled.

Why? Because most Forex markets are closed on Saturday and Sunday, but interest in the financial world continues 7 days a week. Brokers must aggregate the Swap for Saturday and Sunday into the trading day, mostly on Wednesday night.

Technical reason: The Forex settlement cycle (Settlement) occurs at T+2 (2 business days after trading). When holding an order from Wednesday to Thursday, the settlement falls on Monday, crossing the weekend. Therefore, the Swap for 3 days is calculated on Wednesday night.

How to find Swap information on trading platforms

For standard platforms (MT4, MT5)

1. Go to Market Watch
2. Right-click on the asset
3. Select Specification
4. Look for Swap Long and Swap Short

The numbers are shown in Points, which need to be converted into money based on the value per Point.

For modern trading platforms

New UI systems often display Swap as a percentage (%) per night, which makes calculation more convenient.

How to calculate Swap costs

Method 1: From Points

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

Example:

• Trade Buy 1 Lot EUR/USD
• Swap Long = -8.5 Points
• 1 Point of EUR/USD = $1
• Swap cost = -8.5 USD per night
• For 3-Day Swap night: -8.5 × 3 = -25.5 USD

Method 2: From Percentage

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

Example:

• Buy 1 Lot EUR/USD (100,000 units)
• Current price 1.0900
• Swap rate = -0.008% per night
• Total value = 1 × 100,000 × 1.0900 = 109,000 USD
• Swap cost = 109,000 × (-0.008/100) = -8.72 USD per night

Key point: Swap is calculated from the full value of the position, not from the margin amount. Therefore, with high leverage, Swap costs can become significant relative to the margin.

Risks of Swap Costs

Erosion of profits: You might make a profit of 30 USD, but if you hold for 3 nights with a 3-Day Swap, you could lose 26 USD, leaving a net profit of only 4 USD.

Leverage risk: In a stable market, Negative Swap can slowly eat into your margin day by day. Traders might be forced to close positions before the market moves as planned.

Accumulation pressure: The longer you hold an order, the more Swap accumulates. If the market moves slowly, it can lead to a “loss without price change” situation.

Opportunities from Swap Arbitrage

###Carry Trade Strategy

This classic strategy exploits Positive Swap:

• Borrow currencies with low interest (such as JPY or CHF)
• Buy currencies with high interest (such as AUD, MXN, or TRY during certain periods)
• Hold the order long-term to collect positive Swap daily

Example: Buy AUD/JPY to earn positive Swap. The risk is the exchange rate; if AUD/JPY drops sharply, the loss could exceed the accumulated Swap profit.

Swap-Free Account

This account type (often called Islamic account) does not charge Swap regardless of how long the order is held.

Suitable for:

• Swing Traders holding positions for weeks
• Position Traders holding for months
• Traders wanting to avoid hidden costs

Trade-off: Spread may be wider or there may be fixed management fees.

Summary

Swap is not just a floating fee but a cost based on the realities of the global financial markets. Its impact on traders depends on their trading style:

• Scalpers & Day Traders: Less affected as they do not hold overnight
• Swing & Position Traders: Need to pay close attention to Swap because it can accumulate significantly

Choosing a transparent broker and planning trades carefully can help traders avoid unknowingly having this hidden cost eat into their profits.