Swap is – understanding the hidden costs that traders often overlook

When you open a trade in the Forex or CFD market and hold it overnight, the asset price may not move at all, but your portfolio gradually shrinks. This is the function of Swap – the hidden cost that is often less talked about but can significantly impact your profits.

What is Swap and Why Does It Exist?

Swap (or called Overnight Interest, Rollover Fee) is a fee for holding a position overnight. Its core concept comes from “borrowing” one currency to “buy” another currency.

Underlying mechanism: the difference in interest rates

The origin of Swap does not come from broker pricing adjustments but from the interest rate differential between the two currencies, for example:

• Buy EUR/USD: You “buy” EUR (and earn 4.0% annual interest) but “borrow” USD (and pay 5.0% annual interest)

  • Difference: 4.0% - 5.0% = -1.0% (per year) → You pay a negative Swap (cost)

• Sell EUR/USD: You “borrow” EUR (and pay 4.0% annual interest) but “hold” USD (and earn 5.0% annual interest)

  • Difference: 5.0% - 4.0% = +1.0% (per year) → You receive a positive Swap

Theoretically, this makes sense, but in reality, brokers add their own “handling fee,” which can turn a positive Swap into a negative or drastically reduce it.

Types of Swap Traders Encounter

Swap Long and Swap Short

• Swap Long (Buy Swap): Swap rate for buy orders
• Swap Short (Sell Swap): Swap rate for sell orders

These two are never equal because brokers manage costs differently for each side.

Positive and Negative Swap

• Positive Swap: You earn money in your account every night you hold the position (quite rare)
• Negative Swap: You lose money from your account every night (most orders are like this)

3-Day Swap: A point to watch out for

Novice traders often miss this – the Forex and CFD markets are closed on Saturday-Sunday, but interest continues to accrue. Brokers consolidate the Swap for three days (Friday, Saturday, Sunday) into a single day.

• When does this happen? Mostly on Wednesday night (for positions held from Wednesday to Thursday)
• Why? Because of the T+2 settlement cycle in Forex, the system calculates weekly interest in one lump sum.

Example: If your Long Swap is -8.5 USD per night, on Wednesday night it will be calculated as -8.5 × 3 = -25.5 USD instead.

How to check Swap values before trading

On MT4/MT5 platform

1. Open the Market Watch window
2. Right-click on the asset → select Specification (or Properties)
3. Find the lines “Swap Long” and “Swap Short”
4. Values are shown in Points (must be converted)

On other modern platforms

Newer platforms often display this information clearly in the “Introduction” or “Asset Details” section as a percentage per night, making calculations easier.

How to accurately calculate Swap costs

Method 1: Calculating from Points

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

Example:

• Trading 1 Lot EUR/USD long
• Swap Long = -8.5 Points
• For EUR/USD, 1 Point = $1 0.0001( (assuming standard lot)
• Result: )-8.5( × )$10### = -$8.50 per night
• For a 3-Day Swap: -$8.50 × 3 = -$25.50

( Method 2: Calculating from percentage per night

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

Example:

• Buy 1 Lot EUR/USD at 1.0900
• Swap Rate = -0.008% per night
• Position value: 1 × 100,000 × 1.0900 = 109,000 USD
• Swap: 109,000 × )-0.008/100### = -$8.72 per night
• For 3 nights: -$8.72 × 3 = -$26.16

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

This is the scary part – if you use 1:100 leverage on 1 Lot EUR/USD, you might only need about ~1,090 USD Margin, but the Swap is calculated on the full 109,000 USD.

If you lose $8.72 per night, that’s )8.72/1090### × 100 = 0.8% of Margin per night – which can quickly eat into profits or reduce your portfolio.

Risks associated with Swap

( 1. Profit reduction and winning chances You might make a profit of 30 USD from price difference but lose 26 USD to Swap over a 3-Day period, leaving a net profit of only 4 USD )not including spread at opening###

2. Leverage risk

High Swap rates correlate with Margin, potentially leading to Margin Calls if the market moves against you, especially with high leverage.

( 3. Forced exit risk In sideways markets )where prices “decide”###, negative Swap gradually reduces your portfolio. Many traders cannot withstand this pressure and close their orders, even if their original plan was to wait for a breakout.

Opportunities to leverage Swap

( Carry Trade: earning positive Swap as income This classic strategy involves borrowing low-interest currencies )like JPY( to buy high-interest currencies )like AUD, MXN, or TRY###

Example: Buy AUD/JPY

• AUD has high interest → earns from this currency
• JPY has low interest → pays less interest
• Result: receives positive Swap daily for holding the order

Risk: Exchange rates can move – if AUD/JPY drops, exchange loss may outweigh Swap gains many times over.

( Swap-Free (Islamic Account)) Many brokers offer this account type to accommodate Islamic principles (which prohibit interest)

• Advantages: No Swap charges regardless of how long you hold the order
• Disadvantages: Spread may be wider than regular accounts or have fixed management fees

Ideal for Swing Traders or Position Traders holding positions for weeks or months.

Summary

Swap is not just a random fee – it’s a real cost rooted in financial fundamentals. Its impact depends on your trading style:

• Scalpers/Day Traders: Little to no impact, as they close positions within minutes or hours
• Swing/Position Traders: Need careful planning – choose to trade only the positive Swap side or use Swap-Free accounts
• Carry Traders: Use Swap as a primary income strategy but must be aware of exchange rate risks

Choosing a broker that displays Swap information clearly and transparently helps you calculate costs accurately and plan your trades without hidden surprises later.