Swap in Forex Trading: Hidden Costs Traders Need to Know

What is Swap?

Swap is the overnight holding fee, sometimes called “Overnight Interest” in the Forex trading world. It is the interest accrued from holding your trading orders overnight. In other words, it is the cost you pay or receive for lending and borrowing money in Forex trading.

When you trade currency pairs like EUR/USD, you are “borrowing” one currency to “buy” another. This borrowing incurs a cost because each currency has its own policy interest rate set by its central bank. The difference between these two interest rates is the reason for the Swap.

Basic Reasons for Swap

Interest Rate Differential (

Each country sets its own policy interest rate, for example, the US dollar )USD( is set by the FED, Euro )EUR( by the ECB. For example:

• Buy EUR/USD: You buy EUR )earning 4.0% per year( and borrow USD )pay 5.0% per year(. The difference is -1.0% per year.
• Sell EUR/USD: You borrow EUR )pay 4.0% per year( and hold USD )earning 5.0% per year(. The difference is +1.0% per year.

However, brokers act as intermediaries in this borrowing. They add their own “management fee.” Therefore, although theoretically Swap should be positive, in reality, the Swap Long and Swap Short often differ, and both sides can sometimes be negative.

Types of Swap You May Encounter

) Positive Swap and Negative Swap ###

Positive Swap occurs when you earn a small amount of interest each night. This happens when the interest rate of the asset you “buy” is higher than that of the asset you “borrow.”

Negative Swap is more common. You pay out money from your account every night when the interest rate of the asset you “buy” is lower than that of what you “borrow.”

Swap Long ( and ) Swap Short (

• Swap Long )Buy Swap###: The swap rate used when you open a Buy order.
• Swap Short (Sell Swap): The swap rate used when you open a Sell order.

( 3-Day Swap )Triple Swap(

This is a common pitfall for beginner traders. Usually, Swap is calculated once per day, but there is one day in the week when you are charged a 3x Swap )3x Swap(.

The reason is that the Forex market is closed on Saturday and Sunday, but interest continues to accrue in the financial world every day, even on holidays. Therefore, brokers consolidate the Swap charges for Saturday and Sunday into the trading day, mostly on Wednesday night )for positions held from Wednesday through Thursday###, because the Forex market settlement cycle (Settlement) is T+2.

How to Find and Calculate Swap Fees

( Viewing Swap Rates on MT4/MT5 Platforms

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

( Calculation Method 1: From Points

Formula: Swap )in money( = )Swap Rate in Points( × )Value of 1 Point$10

Example:

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

( Calculation Method 2: From Percentage Rate )%(

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

Total position value = )Number of Lots( × )Contract Size( × )Market Price at Swap Time(

Example:

• Trading 1 Lot EUR/USD )1 Lot = 100,000 units(
• Price EUR/USD = 1.0900
• Swap Rate for Buy = -0.008% per night
• Position value: 1 × 100,000 × 1.0900 = 109,000 USD
• Calculation: 109,000 × )-0.008 / 100### = -8.72 USD per night
• For a 3-Day Swap: (-$8.72) × 3 = -$26.16 USD

How Swap Affects Trading

Hidden Cost to Be Aware Of

The key point for traders is that Swap is calculated based on the “full value” of the position, not the Margin you put up. Suppose you use leverage 1:100 to open 1 Lot:

• Full value: 109,000 USD
• Margin: about 1,090 USD
• Swap per night: -8.72 USD
• Compared to Margin: ###8.72 / 1,090( × 100 = 0.8% of Margin per night

This is why Swap can be a hidden cost that becomes dangerous when using high leverage. If you hold a position in a stable market, Swap can gradually eat away your Margin until your account is wiped out.

) Main Risks

1. Profit Erosion: A trader might profit 30 USD from price difference, but if they hold for 3 nights with a -26 USD 3-Day Swap, net profit drops to only 4 USD.
2. Leverage Risk: Swap calculated on full position value increases the risk of Margin Calls.
3. Forced Closure: In sideways markets, holding positions with Negative Swap results in slow daily losses.

Opportunities from Understanding Swap

( Carry Trade Strategy )

This strategy exploits positive Swap directly. The idea is to “borrow” a low-interest currency (like JPY) to “buy” a high-interest currency ###like MXN or TRY(.

Example: Buy AUD/JPY )buy Australian dollar and borrow Japanese Yen, which have low interest(. If the Swap Long rate is positive, you earn interest every night you hold the position.

Risk: The main risk is exchange rate movement. If AUD/JPY drops sharply, the loss from exchange rate changes could outweigh the accumulated Swap profits over years.

) Swap-Free Islamic Account ###

Due to Islamic religious principles prohibiting interest, brokers offer Swap-Free accounts, which do not accrue Swap regardless of how long the position is held.

This option is ideal for:

• Muslim traders
• Swing Traders holding positions for weeks
• Position Traders holding for months

Generally, Swap-Free accounts may have wider Spreads or fixed management fees.

Swap in Other Assets ###Beyond Forex(

) CFD Stocks and Indices

Swap fees usually depend on the interest rates of the currencies involved in the asset. For US stocks, it’s based on USD interest minus broker holding fees.

CFD Commodities

Often more complex, possibly based on storage costs Storage Costs or rollover of futures contracts.

CFD Cryptocurrencies

Usually based on the Funding Rate in exchange markets, which can be highly volatile.

Summary

Swap is not just a minor fee but a significant cost that impacts trading differently depending on the trading style:

• Scalpers: Trade very short-term, minimal impact.
• Swing/Position Traders: Must consider Swap seriously and may choose to trade the side with positive Swap or use Swap-Free accounts.

Choosing a broker transparent about fees and with clear platform information helps you plan your trades carefully, avoiding hidden costs that might surprise you later.