Swaps in Trading: Often Overlooked Costs and How to Calculate Them Correctly

When it comes to trading costs, beginners often think of Spread or Commission first, before anything else. But there is another expense that often gets overlooked — Swap. Holding an overnight position is not without cost, and misunderstanding it can cause your profits to vanish unnoticed.

What is Swap Really, and Why Does It Exist?

Swap is actually a fee for holding a (Position) beyond market close. In financial terms, it’s called “Overnight Interest” or “Rollover Fee.” Simply put, it’s the interest charged for borrowing money to trade.

The reason Swap exists is more complex than just a fee set by brokers. Its core derives from the Interest Rate Differential (Interest Rate Differential), especially in Forex trading.

When you trade currency pairs like EUR/USD, you are “borrowing” one currency and “buying” another simultaneously. If you open a Buy EUR/USD position, you are “buying” EUR and “borrowing” USD to pay for that purchase. Conversely, if you open a Sell EUR/USD, you “borrow” EUR and “hold” USD.

Each currency in the world has its own policy interest rate, set by its central bank. For example, the Federal Reserve (FED) sets the rate for USD, while the European Central Bank (ECB) sets the rate for EUR.

When you borrow a currency, you pay interest on it. When you hold a currency, you should earn interest from it. Swap is the net difference between these two.

To clarify with an example:

Suppose EUR interest rate is 4.0% per year, and USD interest rate is 5.0% per year.

• If you Buy EUR/USD: you earn EUR interest (4.0%) and pay USD interest (5.0%). The difference is -1.0% per year, meaning you pay Swap.
• If you Sell EUR/USD: you pay EUR interest (4.0%) and earn USD interest (5.0%). The difference is +1.0% per year, meaning you receive Swap.

However, in reality, middlemen brokers want their profit too. They add a “management fee” into the actual Swap rate. So, even if theoretically you should get a positive Swap, the broker might reduce it significantly or turn it negative for both Long and Short positions.

Types of Swap Traders Encounter

Swap Positive and Swap Negative

Positive Swap occurs when you receive money into your account every night for holding an order. This happens when the interest of the asset you hold is significantly higher than the borrowed one, even after deducting broker fees.

Negative Swap is more common. You pay money out of your account every night when the interest of the borrowed currency exceeds that of the held currency, or if the interest difference is small but not enough to cover broker fees.

Swap Long and Swap Short

Swap Long (Swap Buy) is the rate used when you open a Buy order.

Swap Short (Swap Sell) is the rate used when you open a Sell order.

These two are not always equal because the interest rates of the currencies (or assets) on both sides are not the same.

3-Day Swap: What Beginner Traders Often Miss

This is interesting and often misunderstood. Usually, Swap is calculated once per day, but on one weekday, you are charged 3 times (3x).

Reason: Most Forex and CFD markets are closed on Saturday and Sunday, but interest in the financial system continues every day. Even on holidays, brokers aggregate the interest for Saturday-Sunday into the trading day.

Which day? Mostly on Wednesday night (holding from Wednesday to Thursday). Since Forex markets settle T+2 (2 business days after trading), trading on Wednesday → settlement on Friday → over the weekend → the account is reset for settlement on Friday, which falls on Monday. Therefore, brokers include 3 days’ interest in the Wednesday night rollover.

How to Check Swap Rates Before Trading

Knowing the Swap amount is very important because it helps you plan your costs. The method to check varies depending on the platform and broker.

On MT4/MT5 platforms:

1. Go to the Market Watch window
2. Right-click on the asset (e.g., EUR/USD)
3. Select Specification (Details)
4. A new window will display info. Look for “Swap Long” and “Swap Short”
5. The numbers are usually in Points, which need to be converted, or sometimes in % per year

On modern broker platforms:

Many platforms are designed to be more user-friendly, showing “Overnight Fee” as a percentage (%) per night, which makes calculation easier.

How to Calculate Swap Costs in Detail

Method 1: From Points Units (MT4/MT5)

Formula for trading 1 Lot Standard (100,000 units):

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

Example:

• Trading Buy 1 Lot EUR/USD
• Swap Long = -8.5 Points
• For EUR/USD, 1 Lot, 1 Pip (10 Points) = $10 USD$1
• So, 1 Point = (USD)
• Calculation: (-8.5 Points) × ($1) = -8.5 USD per night
• If that night is a 3-Day Swap: ###-8.5( × 3 = -25.5 USD

) Method 2: From percentage (%) per night

Swap (in money) = (Account Value) × (Swap Rate %)

Account value = (Lot) × (Contract Size) × (Market Price)

Example:

• Buy 1 Lot EUR/USD (100,000 units)
• Price EUR/USD = 1.0900
• Swap Rate for Buy = -0.008% per night

Step 1: Account value = 1 × 100,000 × 1.0900 = 109,000 USD

Step 2: Swap = 109,000 × (-0.008 / 100) = -8.72 USD per night

If that night is a 3-Day Swap: ###-8.72### × 3 = -26.16 USD

( Key points to be aware of:

Swap is calculated based on the “full” value of the position, not just the Margin you put up. For example, if you leverage 1:100 to buy 1 Lot EUR/USD worth 109,000 USD, your Margin might be only 1,090 USD. But the Swap is calculated on the full position size, so it’s 8.72 USD. Compared to your Margin, that’s about 0.8% per night.

This is why Swap can be a hidden cost that’s dangerous. With high leverage and holding positions in a sideways market, Swap can quickly eat into your Margin, potentially wiping out your account even if prices hardly move.

Opportunities and Risks of Swap

) Main Risks:

Erosion of profit: Your trading gains can be eaten away by Swap. For example, if you gain 30 USD from price movement but hold for 3 nights and pay 3-Day Swap of -26 USD, your net profit is only 4 USD ###not including Spread(.

Forced liquidation: In sideways markets, holding positions with Negative Swap daily results in slow losses. Many traders can’t withstand the pressure and close their orders, missing the chance for the price to reach their target.

Leverage risk: Since Swap is based on the full position value, the risk of Margin Calls increases significantly.

) Possible Opportunities:

Carry Trade Strategy: This classic approach exploits positive Swap directly. The idea is to “borrow” currencies with very low interest rates (e.g., JPY or CHF) to “buy” currencies with high interest rates (e.g., MXN or TRY) at certain times( to earn positive Swap daily.

Example: Buy AUD/JPY )buy Australian dollar, which has high interest, and borrow Japanese yen, which has low interest(. If there’s a positive Swap, you earn every day.

Risks: The market can move unpredictably. Exchange rate losses might outweigh accumulated Swap gains.

Swap-Free )Islamic Account: These accounts do not charge Swap at all. They are ideal for Swing Traders or Position Traders holding positions for weeks or months. Brokers often compensate by slightly widening the Spread or charging a fixed fee.

Summary

Swap is not a trivial matter to ignore. Its impact on your trading depends on your trading style:

• Scalping traders short-term: Usually unaffected because they don’t hold overnight.
• Swing or Position traders: Should consider Swap seriously. They might choose only the side with positive Swap or opt for Swap-Free accounts.
• Carry traders: Swap is an opportunity for extra income but requires understanding market risks.

Choosing a transparent broker with clear fee structures and platforms that display Swap info explicitly will help you plan your trades carefully, avoiding hidden costs that could surprise you later.