What is a swap? A cost that is often overlooked even though it cannot be avoided.

Many traders often overlook an important cost like Swap, which can eat into profits more than the combined commissions and spreads. A deep understanding of Swap is a way to protect your portfolio from this hidden risk.

What is Swap? And Why Is It the Interest Rate Differential?

Swap is a fee for holding a position overnight, known in financial terms as “Overnight Interest” or “Rollover Fee.” It essentially represents the interest accrued from holding a trade outside of market hours when the market is closed.

Swaps arise from the concept of “Interest Rate Differential” (Interest Rate Differential), especially in Forex trading. When you trade currency pairs like EUR/USD, you are borrowing one currency to buy another.

• Long (Buy) EUR/USD: Buy EUR and borrow USD to pay
• Short (Sell) EUR/USD: Borrow EUR and hold USD back

Each currency has its own policy interest rate set by its central bank. For example, the FED sets the USD rate, and the ECB sets the EUR rate. When you borrow a currency, you pay that interest; when you hold a currency, you should receive interest. Swap is the net difference between these two.

Real Example: When Swap is Positive and Negative

If the Euro (EUR) interest rate is 4.0% per year, and the US dollar (USD) interest rate is 5.0% per year:

• Buy EUR/USD: Earn EUR (4.0%) but pay USD (5.0%) → Difference = -1.0% (Pay Swap Negative)
• Sell EUR/USD: Pay EUR (4.0%) but receive USD (5.0%) → Difference = +1.0% (Receive Swap Positive)

Why Do You Pay? Broker Markup

In reality, brokers act as intermediaries in this borrowing process. They add their own management fee into the actual Swap rate. Therefore, even if theoretically you should receive a positive Swap +1.0%, the broker might reduce it to +0.2% or, in the worst case, turn both sides negative. This is why Swap Long and Swap Short are not equal.

Swap for Various Assets

The concept of Swap extends beyond Forex to other assets:

Stocks (Stocks) and Indices (Indices): Swap based on the interest rates of the currencies involved in the asset, e.g., US stocks based on USD interest minus broker fees.

Commodities (Commodities): More complex, possibly based on storage costs (Storage Costs) or futures contract rollovers.

Cryptocurrencies (Crypto): Based on the Funding Rate in exchange markets, which can be highly volatile.

Types of Swap You Should Know

Swap Positive vs Swap Negative

Positive Swap: Money flows into your portfolio when the interest of the asset you buy is higher than what you borrow.

Negative Swap: Money flows out of your portfolio (Generally), occurring when the interest of the asset you buy is lower than what you borrow, or even if higher, it doesn’t cover the broker’s markup.

Swap Long vs Swap Short

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

3-Day Swap (Triple Swap) - most commonly encountered

This is a common pitfall for beginner traders. Usually, Swap is calculated daily, but on one day of the week, it is tripled.

Why? Because Forex and CFD markets are closed on Saturday-Sunday, but interest accrues every day. Brokers must aggregate the Swap fees for Saturday-Sunday into the trading day.

Which day? Mostly on Wednesday (for holding from Wednesday to Thursday), because Forex settlement occurs T+2 (2 business days after trading). When you hold from Wednesday overnight to Thursday, the settlement falls on Monday (crossing Saturday-Sunday). You are borrowing money over the weekend, so the broker charges a 3-day accumulated interest.

Important: Some brokers use Friday or other days; check your broker’s policy clearly.

How to Check Swap Rates Before Trading

On MT4/MT5 (Standard Platforms)

1. Go to the Market Watch window (Asset List)
2. Right-click on the asset (e.g., EUR/USD)
3. Select Specification
4. A new window appears. Look for “Swap Long” and “Swap Short”
5. The numbers are shown in Points (to be calculated) or sometimes % per year

On Modern Platforms

Newer brokers often display Swap information clearly and conveniently. Look for “Overnight Fee” (Overnight Fee), usually shown as a percentage per night, making calculations easier.

How to Calculate Swap Costs Accurately

Method 1: Calculate from Points (MT4/MT5)

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

Example: Buy 1 Lot EUR/USD, Swap Long = -8.5 Points

• 1 Lot EUR/USD: 1 Pip (10 Points) = $10 USD
• Therefore, 1 Point = $1 USD
• Swap = (-8.5) × ($1) = -$8.5 USD per night
• If calculating for 3 days: (-8.5) × 3 = -$25.5 USD

Method 2: Calculate from Percentage (% per night)

Formula: Swap (Money) = (Total Position Value) × (Swap Rate %)

Example:

• Buy 1 Lot EUR/USD at 1.0900
• Swap Long = -0.008% per night
• Total Value = 1 Lot × 100,000 × 1.0900 = 109,000 USD
• Swap = 109,000 × (-0.008 / 100) = -8.72 USD per night

Key Point: Swap is calculated from the full value (109,000 USD), not the margin. If using 1:100 leverage, you only need to deposit 1,090 USD, but you pay 8.72 USD per night, which is about 0.8% of your margin per night. This highlights the risk of Swap with high leverage.

Opportunities for Profit from Swap

###Carry Trade - Classic Strategy

Leverage positive Swap by borrowing low-interest currencies (like JPY) to buy high-interest currencies (like MXN or TRY).

Example: Buy AUD/JPY (buy Australian dollar, high interest + borrow Japanese Yen, low interest). If the Swap Long is positive, you earn every night.

Risk: The main risk is exchange rate fluctuations. Losses from price drops can outweigh Swap profits over years. This strategy is suitable when the market is stable.

Swap-Free Account (Islamic Account)

This account type does not accrue Swap regardless of how long the order is held. Suitable for Swing Traders and Position Traders holding for weeks or months.

Cost: Might pay wider spreads or an administration fee (Administration Fee) if holding beyond a certain number of days.

Summary: Swap and Your Trading Style

Swap is not just a fee; it is central to trading decisions:

• Short-term traders: Little to no impact (close within minutes or hours, no Swap)
• Medium-term traders: Must seriously consider negative Swap
• Long-term traders: Should choose only positive Swap trading or use Swap-Free accounts

Finally, choosing a broker with transparent Swap data and a platform that clearly displays this information helps you plan your trades confidently without hidden costs surprising you later.