Swap is the cost that impacts your profit: delve into the mechanism

When considering trading costs, most traders first think of the Spread and Commission fees. However, there is another factor often overlooked, especially by beginners, which is Swap. If not managed properly, it can quietly erode your profits.

What does Swap mean and why is it important?

Swap is the fee charged when you hold an open position overnight. In formal financial language, it is called “Overnight Interest” or “Rollover Fee.” Simply put, it is the interest you pay or receive for holding a trading position beyond one day.

Why does Swap exist?

Instead of viewing Swap as just a broker’s arbitrary fee, the reality is more complex. The origin of Swap is the Interest Rate Differential (Interest Rate Differential), which is most evident in Forex trading.

When you trade currency pairs, such as EUR/USD, you are actually:

• In Buy EUR/USD: Borrow USD and buy EUR
• In Sell EUR/USD: Borrow EUR and buy USD

Each currency has its own policy interest rate set by its central bank, e.g., USD by the FED, EUR by the ECB. When you borrow one currency, you pay interest; when you hold a currency, you earn interest. Swap is the net difference of these two interest rates.

Example: If EUR interest rate = 4.0% per year and USD interest rate = 5.0% per year:

• Buy EUR/USD: Earn EUR interest 4.0% but pay USD interest 5.0% → Net difference = -1.0% (You pay)
• Sell EUR/USD: Pay EUR interest 4.0% but receive USD interest 5.0% → Net difference = +1.0% (You receive)

Why do we mostly pay Swap?

In theory, you might expect to receive a positive Swap, but in reality, brokers add their own management fees. Therefore, even if the interest rate differential is positive, the Swap you receive may decrease or turn negative. This is why Swap Long and Swap Short are never equal.

Types of Swap that traders should know

Positive Swap (Positive Swap)

When you receive money every night for holding an order, this occurs when the interest of what you buy is higher than what you borrow (after deducting broker fees)

Negative Swap (Negative Swap)

When you pay money every night, which is a common situation, occurs when the interest of what you buy is lower than what you borrow.

3-Day Swap (Triple Swap)

This is a point where beginner traders often make mistakes. Usually, Swap is calculated once per day, but there is one day in the week where it is calculated as 3 times because the Forex market is closed on Saturday-Sunday, but interest continues to accrue. Brokers combine the calculation for those 3 days, typically on Wednesday night (from Wednesday to Thursday) due to the T+2 settlement cycle of the Forex market.

How to find Swap values on trading platforms

On MT4/MT5

1. Go to Market Watch
2. Right-click on the asset (such as EUR/USD)
3. Select Specification
4. Look for Swap Long and Swap Short (usually shown as Points)

On modern platforms

Newer brokers often display this information clearly in the “Introduction” or “Asset Details” section, showing as a percentage (%) per night, which is easier to calculate.

How to calculate Swap costs in detail

Method 1: From Points units (MT4/MT5)

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

Example:

• Trading 1 Lot EUR/USD with Swap Long = -8.5 Points
• For EUR/USD, 1 Lot, 1 Point = $1 USD$1
• Swap per night = -8.5 × ###= -8.5 USD
• For a 3-Day Swap = -8.5 × 3 = -25.5 USD

( Method 2: From percentage )%( per night Swap = )Full position value( × )Swap rate %(

Example:

• Trading 1 Lot EUR/USD at 1.0900
• Overnight fee = -0.008%
• Full value = 1 × 100,000 × 1.0900 = 109,000 USD
• Swap = 109,000 × )-0.008 ÷ 100( = -8.72 USD
• For a 3-Day Swap = -8.72 × 3 = -26.16 USD

Key point: Swap is calculated based on the full position value, not the margin. )If using 1:100 leverage to open 1 Lot with only 1,090 USD margin, the loss from Swap (8.72 USD) is 0.8% of the margin per night. This is why Swap can become a hidden cost that is quite significant.

Opportunities and risks of Swap

Risks

• Profit eaten away: You might gain 30 USD from price difference, but after deducting 3-day Swap, only 4 USD remains.
• Psychological pressure: When the market is sideways (Sideways), Negative Swap generates daily costs, forcing you to close positions prematurely.
• Leverage risk: Swap costs are high relative to margin, increasing the risk of Margin Calls.

Opportunities

• Carry Trade (Carry Strategy): Take advantage of positive Swap by borrowing low-interest currencies (JPY, CHF) to buy high-interest currencies (AUD, NZD) and earn positive Swap daily. The risk is that exchange rates may move enough to offset the Swap gains over time.
• Swap-Free Accounts (Islamic Account): Many brokers offer accounts that do not charge Swap for overnight positions, suitable for Muslim traders and Swing Traders. Although the spread may be slightly wider, it compensates for the absence of Swap costs.

Final summary

Understanding Swap is not just academic; it is a way to prevent hidden costs. For short-term traders, the impact may be minimal, but for those holding positions for weeks or months, Swap can be a decisive factor between profit and loss. Choosing a broker that transparently displays Swap information will help you plan your trades more effectively.

Investing involves risks and may not be suitable for everyone.