Swap in Trading: Origin, Types, and How to Calculate It for Better Understanding

Traders face various types of costs. In addition to spreads and commissions, there is a hidden cost often overlooked, especially among beginner traders: Swap (overnight fee)

Understanding what Swap is, where it comes from, and how it is calculated will help you plan your trades effectively and avoid losses from this hidden cost.

What is Swap and Why Does It Exist

Swap or overnight fee is the cost incurred when you hold a (Position) overnight or beyond the trading day. It is comparable to “interest” in traditional finance.

Origin of Swap

The origin of Swap is more complex than it seems, but its core comes from “interest rate differentials” (Interest Rate Differential), especially in Forex trading.

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

• Borrowing one currency
• Buying another currency

For example:

• If you open a Buy (Long) EUR/USD order: you “buy” EUR and “borrow” USD to pay for it
• If you open a Sell (Short) EUR/USD order: you “borrow” EUR and “hold” USD

All currencies in the world have their own policy interest rates, set by their central banks, such as:

• US dollar (USD) set by FED
• Euro (EUR) set by ECB

When you “borrow” a currency, you must pay interest, and when you “hold” a currency, you should receive interest. Swap is the net difference of interest between the two sides.

Example of Swap Calculation

Suppose:

• EUR interest rate = 4.0% per year
• USD interest rate = 5.0% per year

If you Buy EUR/USD:

• You earn EUR interest (4.0%) and pay USD interest (5.0%)
• Difference = 4.0% - 5.0% = -1.0% (per year)
• Result: You must **pay Swap (as a negative) fee

If you Sell EUR/USD:

• You pay EUR interest (4.0%) and receive USD interest (5.0%)
• Difference = 5.0% - 4.0% = +1.0% (per year)
• Result: You receive **Swap (as a positive) fee

Why Do We Usually Lose

In reality, Forex brokers are intermediaries facilitating this borrowing. They add their “management fee” or “spread” to the actual Swap rate.

Thus, even theoretically you should “receive” a positive Swap, the broker might add their fee, reducing the actual Swap you get, or sometimes turning it into a “cost” for both Long and Short positions.

This is why Swap Long and Swap Short rates are never exactly equal.

Swap for Different Asset Types

The concept of Swap is not limited to Forex.

( CFD Stocks and Indices

Swap rates often depend on the interest rates of the currencies involved, e.g., US stocks based on USD interest minus broker holding fees.

) CFD Commodities ###Gold, Oil###

More complex, possibly based on storage costs (Storage Costs) or rollover of futures contracts (“Rolling over” from old to new contract)

( CFD Cryptocurrencies

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

Types of Swap You Should Know

) Positive Swap

Occurs when you gain a small amount of money each night for holding an order, happening when the interest of the asset you “buy” is higher than what you “borrow” ###even after deducting broker fees###

( Negative Swap

Most common scenario: you pay money out of your account every night, when the interest of the asset you “buy” is lower than what you “borrow,” or even if slightly higher but not enough to cover fees.

) Swap Long vs. Swap Short

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

( 3-Day Swap )3x 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 3 times (3x Swap).

Reason: Most Forex and CFD markets are closed on Saturday-Sunday, but interest accrues daily. Even on holidays, brokers accumulate and charge the Swap for Saturday and Sunday on the next trading day.

Which day: Mostly on Wednesday night. The technical reason is that Forex settlement occurs T+2 (2 business days after the trade date). So, when you hold an order from Wednesday to Thursday, the T+2 settlement falls on Monday (skipping Saturday-Sunday). The broker sums the interest for all 3 days into Wednesday night.

Some brokers may use Friday or other days, depending on policy and asset type. Check with your broker for clarity.

How to View Swap Rates on Trading Platforms

( On standard platforms )MT4, MT5###

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

( On broker platforms

Some brokers design their platforms to display info clearly:

1. Select the desired asset
2. Find the overnight fee info
3. Show as a percentage )%### per night, which is easier to calculate

How to Calculate Swap Costs

( Method 1: From “Points” units )MT4/MT5###

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

Example:

• Buy 1 Lot EUR/USD
• Swap Long = -8.5 Points
• For EUR/USD, 1 Lot, 1 Pip = (10 Points), worth = (USD
• 1 Point = )USD
• Calculation: (-8.5) × ($1) = -8.5 USD per night
• For 3-Day Swap: (-8.5) × 3 = -25.5 USD

$10 Method 2: From “Percentage” $1 %( per night

Formula: Swap in money = Total position value × Swap rate percentage

Total position value = )Lot( × )Contract Size( × )Price at swap calculation###

Example:

• Buy 1 Lot EUR/USD (1 Lot = 100,000 units)
• Price EUR/USD = 1.0900
• Overnight fee (Buy) = -0.008%

Steps:

1. Total position value = 1 × 100,000 × 1.0900 = 109,000 USD
2. Swap = 109,000 × (-0.008 / 100) = -8.72 USD per night
3. For 3 nights: (-8.72) × 3 = -26.16 USD

( Key Point

Swap is calculated based on the “full” value of the position, not just the margin you put up.

If you leverage 1:100 on 1 Lot, you might only need about 1,090 USD margin but pay 8.72 USD swap per night. That is )8.72 / 1,090( × 100 = 0.8% of margin per night

With high leverage and holding in a stable market, swap costs can eat into your margin until it’s exhausted, even if prices hardly move.

Opportunities and Risks of Swap

) Risks

Eroding profits: You might make a profit of 30 USD from price difference, but if you hold for 3 nights and are charged 3-Day Swap of -26 USD, net profit is only 4 USD (not including spread)

Forcing position closure: In sideways markets, holding positions with negative swap gradually results in losses each day. Many traders cannot withstand this and close their positions.

Leverage risk: Swap costs based on full position value increase the risk of margin calls.

( Opportunities

Carry Trade Strategy: Take advantage of positive swaps directly.

The idea is to “borrow” currencies with very low interest rates )e.g., JPY( and “buy” currencies with high interest rates )e.g., MXN(.

Example: Buy AUD/JPY )buy high-interest AUD and borrow low-interest JPY(. If the Swap Long rate is positive, you earn every night.

Carry Trade risk: If the exchange rate moves unfavorably, e.g., AUD/JPY drops sharply, the loss from exchange rate movement could outweigh the accumulated Swap profit over years.

Swap-Free Accounts )Islamic Accounts###: Due to Islamic prohibitions against interest, many brokers offer these accounts.

No Swap is charged regardless of how long you hold the order. Suitable for Swing or Position traders holding for weeks or months.

Providers earn elsewhere, such as wider spreads or fixed management fees.

Summary

Swap is not just a trivial fee; it’s a real cost that must be considered in every trading strategy.

The impact of Swap varies with your trading style:

• Very short-term traders: hardly affected (opening and closing within minutes/hours)
• Long-term traders: significantly affected; should choose assets with positive swap or use Swap-Free accounts.

Choosing transparent brokers and platforms that clearly display this info will help you plan your trades carefully and avoid hidden costs that could surprise you later.