Swap costs in trading: The often-overlooked expense

When it comes to trading costs, investors often think of Spread and Commission, but there is a more serious cost that is often overlooked: Swap. A deep understanding of Swap will help you assess the true cost of trading and avoid losses from this hidden expense.

What is Swap?

Swap, also known in financial terms as “Overnight Interest” or “Rollover Fee,” is the fee for holding a (Position) overnight. In other words, it is the interest accrued when you decide to hold a trade position overnight.

The origin of Swap

The source of Swap is not simple; it fundamentally derives from the “Interest Rate Differential” (Interest Rate Differential), especially in Forex trading.

When you trade currency pairs like EUR/USD, you are doing two things simultaneously:

• If Buy (Long) EUR/USD: You buy EUR (and receive interest from the ECB) but borrow USD (and pay interest from the FED)
• If Sell (Short) EUR/USD: You borrow EUR (and pay interest from the ECB) but hold USD (and receive interest from the FED)

Each currency has its own policy interest rate. For example, if EUR is at 4.0% annually and USD at 5.0% annually:

• If you Buy EUR/USD: You earn 4.0% from EUR but pay 5.0% for USD = interest differential of -1.0% (must pay Swap)
• If you Sell EUR/USD: You pay 4.0% for EUR but receive 5.0% from USD = interest differential of +1.0% (receive Swap)

In practice, brokers act as intermediaries facilitating this borrowing. They add their own “management fee” or “markup” to the Swap rate, so even if theoretically you might get a positive Swap, in reality it could be reduced significantly or turn negative on both sides.

Types of Swap that traders need to know

Positive Swap (Swap Positive)

Occurs when you receive a small amount of money into your account each night for holding the position. This happens when the interest rate of the asset you buy is significantly higher than that of what you borrow.

Negative Swap (Negative Swap)

This is the most common scenario. You have to pay money out of your account every night. It occurs when the interest rate of the asset you buy is lower than that of what you borrow.

Swap Long and Swap Short

• Swap Long: The Swap rate used when you open a Buy position
• Swap Short: The Swap rate used when you open a Sell position

These two rates are never the same because brokers include their profit margin.

( 3-Day Swap )Triple Swap( This is a common pitfall for beginners. Normally, Swap is calculated once per day, but there is one day in the week when you are charged a 3x Swap.

Reason: Most Forex and CFD markets close on Saturday-Sunday, but financial interest continues to flow. Therefore, brokers must consolidate the Swap for the holiday into the trading day.

Which day: Usually on Wednesday night )for holding a position from Wednesday through Thursday(, because the Forex settlement cycle is T+2, meaning trades on Wednesday settle on Friday )over the weekend###.

How to view Swap rates on trading platforms

( For standard platforms )MT4, MT5(

1. Go to the Market Watch window
2. Right-click on the asset
3. Select “Specification”
4. Look for the lines “Swap Long” and “Swap Short”
5. The numbers shown are usually in Points )points###, which need to be converted accordingly

( For other trading platforms Some platforms display Swap as:

• Percentage per night )% per day(
• Percentage per year )% per year(
• Fixed amount )Fixed Amount(

Always check the asset details )Asset Details### or Specification section before opening an order.

How to calculate Swap costs

( Method 1: Calculation based on Points

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

Example:

• Buy 1 Lot EUR/USD
• Swap Long = -8.5 Points
• For EUR/USD 1 Lot, 1 Pip )10 Points$10 = $1 USD(
• Therefore, 1 Point = )USD(
• Calculation: )-8.5### × ($1) = -$8.5 USD per night
• For a 3-Day Swap: -$8.5 × 3 = -$25.5 USD

( Method 2: Calculation based on percentage per night

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

Example:

• Buy 1 Lot EUR/USD )100,000 units###
• EUR/USD price at 1.0900
• Swap Buy = -0.008% per night
• Step 1: Position value = 100,000 × 1.0900 = 109,000 USD
• Step 2: Swap = 109,000 × (-0.008 / 100) = -8.72 USD per night
• For a 3-Day Swap: -8.72 × 3 = -26.16 USD

Key point: Swap is calculated on the full position value, not on the Margin

Remember: Swap costs are based on the total position value ###109,000 USD(, not just the Margin you put up.

If you leverage 1:100, you might only put up 1,090 USD Margin, but the Swap cost per night is 8.72 USD, which is about 0.8% of Margin per night. This is why Swap can be a significant cost when trading with high leverage. It can quickly eat into your Margin even if the market moves slightly or not at all.

Risks and opportunities from Swap

) Risks

1. Erosion of profits from exchange rate movements You might gain 30 USD from price movement but lose 26 USD from Swap, leaving a net profit of only a few dollars.

2. Pressure in sideways markets In markets without clear direction, holding a position with Negative Swap results in slow losses every day. Many traders close their positions early due to this pressure.

3. Leverage risk Since Swap is calculated on the full position value, the risk of a Margin Call increases significantly.

( Opportunities

1. Carry Trade Strategy This involves intentionally taking advantage of Positive Swap. The idea is to borrow a low-interest currency )like JPY( to buy a high-interest currency )like AUD( to earn positive Swap and hold the position daily.

Risk: Exchange rate risk. If AUD/JPY drops significantly, the loss from exchange rate changes could outweigh the accumulated Swap profit over years.

2. Swap-Free )Islamic Account Some brokers and trading platforms offer accounts with no Swap charges, suitable for Muslim traders and Position Traders holding positions for weeks or months.

Trade-off: Swap-Free accounts may have wider spreads or fixed management fees.

Summary

Swap is not just a random fee; it is a cost grounded in financial principles. Understanding how it is calculated and its impact on your trading strategy is essential for effective planning.

For short-term traders Scalpers/Day Traders, Swap has little effect because they close positions before nightfall. But for Swing Traders and Position Traders, Swap can be a decisive factor.

Choose to:

• Study Carry Trade strategies if planning to hold positions long-term
• Use Swap-Free accounts if holding positions for several days
• Always evaluate Swap costs beforehand before opening a position

This will enable you to accurately calculate the true trading costs and avoid surprises from hidden expenses.