What is Swap Forex? Why does it affect your profits?

When you just start trading currencies in the Forex market, traders often focus on two things: Spread and Commission. But there is a cost that is often overlooked—Forex Swap—a fee that can gradually eat away at your profits without you realizing it. Understanding what forex swap is and how it’s calculated is a crucial step toward more effective trading planning.

Important! Forex Swap and Hidden Costs Often Overlooked by Beginners

Most traders see a profit of $30 from price movements, but after holding an order for three nights, the Swap fee might quietly deduct $26, leaving only $4 in actual profit—which is quite unprofitable. That’s why forex swap is an important factor not to ignore, especially for those holding positions for days or weeks.

Many beginner traders ignore this fee because they think it’s just a small percentage. But when considering the used Margin (which is often just a fraction of the actual value), the Swap becomes much more significant.

How Forex Swap Works You Need to Know

Where Does Forex Swap Come From?

Forex Swap is a fee for holding a position overnight, arising from the difference in interest rates between two currencies. When you trade EUR/USD, you are “borrowing” one currency and “buying” another.

Each currency in the world has its own policy rate set by its central bank, such as:

• US Dollar (USD): set by the FED
• Euro (EUR): set by the ECB
• Japanese Yen (JPY): set by the Bank of Japan

When you “borrow” a currency, you pay interest on it, and when you “hold” a currency, you should receive interest from it. The net difference between these interest payments is the Swap that your broker charges.

Example of Interest Rate Differential Calculation

Suppose:

• Euro (EUR) interest rate = 4.0% per year
• US Dollar (USD) interest rate = 5.0% per year

If you Buy EUR/USD (buy EUR, borrow USD):

• You earn interest on EUR: +4.0%
• You pay interest on USD: -5.0%
• Your differential: 4.0% - 5.0% = -1.0% (per year)
• Result: You pay Swap

If you Sell EUR/USD (borrow EUR, hold USD):

• You pay interest on EUR: -4.0%
• You receive interest on USD: +5.0%
• Your differential: 5.0% - 4.0% = +1.0% (per year)
• Result: You receive Swap

Why Do Most Traders Have to Pay?

In theory, you might receive a positive Swap, but in reality, brokers act as intermediaries—they facilitate the process and add their own “handling fee.” Therefore, the actual Swap you receive may be less than expected or even turn negative.

Heavy Losses from Swap? How to Calculate Costs Precisely

Method 1: Using “Points” (MT4/MT5)

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

Example:

• You buy 1 Lot EUR/USD
• Swap Long = -8.5 Points
• 1 Pip EUR/USD = $10, so 1 Point = $1
• Calculation: -8.5 × $1 = -$8.50 per night
• For a 3-day swap: -$8.50 × 3 = -$25.50

Method 2: Using “Percentage” (e.g., Mitrade)

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

Example:

• Buy 1 Lot EUR/USD at 1.0900
• Position value: 1 × 100,000 × 1.0900 = $109,000
• Swap rate: -0.008% per night
• Calculation: $109,000 × (-0.008/100) = -$8.72
• 3-day Swap: -$8.72 × 3 = -$26.16

Key Point: Swap is calculated based on the “full value,” not the Margin. If you leverage 1:100 and put up only $1,090 margin, but pay $8.72 in Swap daily, it’s like losing 0.8% of your Margin each day.

Positive vs. Negative Swap: Opportunities and Risks

Main Risks of Negative Swap

1. Eating into Profits
If you make a $30 profit but lose $26 from Swap over three days, your net profit drops to only $4, which may not justify the risk.

2. Market Sideways Pressure
In a non-trending market, daily Swap costs can force traders to close positions even if their original plan isn’t complete.

3. Leverage Risks
Since Swap is based on the full position value, the risk of a Margin Call increases if the market moves against you.

Opportunities: Carry Trade Strategy

This strategy exploits positive Swap to earn money:

• Borrow currencies with low interest (e.g., JPY or CHF)
• Buy currencies with high interest (e.g., MXN or TRY)
• Earn positive Swap daily

Example: Buy AUD/JPY

• AUD: high interest
• JPY: low interest
• Result: receive positive Swap daily

Risk: Exchange rate risk—if AUD/JPY drops sharply, losses from price movement can outweigh Swap gains many times over.

Swap-Free Accounts (Islamic Accounts)

These accounts do not charge Swap regardless of how long you hold the position. Suitable for:

• Swing traders holding for weeks
• Position traders holding for months
• Muslim traders adhering to religious principles

Trade-off: Spread may be wider or there may be a management fee.

How to Check Swap Rates on Platforms

On MT4/MT5

1. Go to Market Watch
2. Right-click on the asset (EUR/USD)
3. Select Specification
4. Look for Swap Long and Swap Short
5. Values are in Points; additional calculation needed

On Mitrade

1. Select the asset
2. Check the “Introduction” section on the right
3. Scroll to find “Overnight Fees”
4. Mitrade displays as a % per night, easy to calculate

Key Takeaways

Forex Swap is an implicit cost that varies with the number of days you hold a position. For scalpers (trading minutes), it’s negligible, but for those holding for days, weeks, or months, it can have a huge impact.

Three options:

1. Choose the direction: Trade only the side with positive Swap (Carry Trade)
2. Use Swap-Free accounts: for flexibility
3. Calculate in advance: Check Swap rates for each currency pair before opening positions

Choosing a transparent broker regarding Forex Swap is essential. It helps you plan your trades accurately and avoid hidden costs that could erode your profits.