Swap in Trading: The Often Overlooked Cost and How to Calculate It Correctly

For most traders, understanding Spread and commissions is common knowledge. However, there is another cost that many overlook: Swap (Overnight Holding Fee). Understanding how Swap is calculated and its impact on your profit and loss can help you plan your trades more effectively and avoid unknowingly eating into your profits.

What is Swap: A More Complex Reality Than You Think

Swap is the fee for holding a (Position) overnight or in financial terms, “Overnight Interest” or “Rollover Fee.” At a basic level, it is the interest accrued from holding a trading contract across days.

However, the origin of Swap is not simple. It is directly related to the Interest Rate Differential (Interest Rate Differential) between the currencies or assets in the trading pair.

Why is Swap Charged?

When you trade EUR/USD, you are not just executing a price action. In reality, you are “borrowing” one currency to “buy” another.

• If you Buy EUR/USD: You “buy” EUR and “borrow” USD
• If you Sell EUR/USD: You “borrow” EUR and “buy” USD back

Central banks of each country set their own policy interest rates, e.g., the Federal Reserve (FED) for USD and the European Central Bank (ECB) for EUR. When you “borrow” a currency, you pay interest, and when you “hold” a currency, you should receive interest. The difference between these two interest rates is the Swap you will pay or receive.

Basic Swap Calculation Example

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

• Buy EUR/USD: You earn EUR interest (4.0%) and pay USD interest (5.0%) → Difference = 4.0% - 5.0% = -1.0% (Pay negative)
• Sell EUR/USD: You pay EUR interest (4.0%) and earn USD interest (5.0%) → Difference = 5.0% - 4.0% = +1.0% (Receive)

Why Do We Usually “Pay” Swap?

In theory, the price might suggest that in some situations you should receive a positive Swap. But in reality, the broker (Broker) is the one controlling the borrowing. They add a “management fee” or “spread” of their own into the actual Swap rate.

For example, even if the theoretical Short Swap (Sell) for EUR/USD should be +1.0%, after the broker adds their fee, you might only get +0.2% or nothing at all. Sometimes, both Long and Short positions can have negative Swap (Pay).

This is why the Swap for Long (Buy) orders and Short (Sell) orders are never exactly the same.

Types of Swap Traders Need to Know

Swap Positive vs Swap Negative

Positive Swap: You receive money in your account for holding an overnight position, occurring when the interest of the asset you buy is higher than what you borrow (even after management fees).

Negative Swap: You pay money out of your account every night. This is common and occurs when the interest of the asset you buy is lower than what you borrow, or the interest does not cover the management fee.

Long Swap and Short Swap

The broker sets different Swap rates for each direction:

• Long Swap (Buy Swap): When you open a Buy order
• Short Swap (Sell Swap): When you open a Sell order

The 3-Day Swap Phenomenon That Beginners Often Miss

This is where many traders are surprised when they see Swap values in their account. Usually, Swap is calculated once per day, but there is one day in the week where the Swap is 3 times (3x Swap).

Why? Forex and CFD markets are closed on Saturday and Sunday, but interest accrues every day, even on holidays. Therefore, the broker consolidates the Swap for Saturday and Sunday into the trading day.

When does this happen? Typically on Wednesday night (for holding from Wednesday to Thursday). Since Forex settlement occurs T+2 (2 business days after trading), holding an order overnight from Wednesday to Thursday means the settlement falls on Monday, crossing a weekend. The broker then must account for Swap over Friday, Saturday, and Sunday.

How to Find Swap Data on Trading Platforms

On MT4/MT5 Platforms

1. Go to Market Watch
2. Right-click on the asset (e.g., EUR/USD)
3. Select Specification (Details)
4. Look for “Swap Long” and “Swap Short” lines
5. The figures are usually in Points and require further calculation

On Modern Platforms

Newer trading platforms often display Swap info as a percentage (%) per night, which is easier to understand and calculate. Select the asset and look for “Overnight Fee” or “Overnight Cost.”

Precise Swap Cost Calculation Formulas

Method 1: From Points (MT4/MT5)

For trading 1 Standard Lot (100,000 units):

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) = $10 USD$1
• 1 Point = (USD)
• Calculation: (-8.5) × ($1) = -8.5 USD per night
• For Wednesday night: ###-8.5( × 3 = -25.5 USD

) Method 2: From Percentage (%) per night

Swap (in money) = (Total position value) × (Swap rate %)

Where total position value = (Number of Lots) × (Contract size) × (Market price at swap calculation)

Example:

• Buy 1 Lot EUR/USD (1 Lot = 100,000 units)
• Current price: 1.0900
• Overnight fee: -0.008% per night

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

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

For a 3-Day Swap: (-8.72) × 3 = -26.16 USD

Key Points for Traders

Important: Swap is calculated based on the full value of the position, not the margin (Margin) you put up.

Example: If you use 1:100 leverage to open 1 Lot EUR/USD, you might only need to deposit 1,090 USD margin, but the Swap is calculated on 109,000 USD. So, -8.72 USD Swap per night represents about 0.8% of your margin.

Holding a position in a sideways market ###Sideways###, Swap costs can quickly eat into your profits even if the price hardly moves.

Opportunities and Risks of Swap

( Risks

Profit Erosion: You might gain 30 USD from price difference, but if you hold for 3 nights and pay a 3-Day Swap of -26 USD, your net profit drops to only 4 USD.

Negative Swap Pressure: In a flat market, negative Swap can slowly drain your account daily. Many traders give up and close positions even if their original plan remains valid.

Leverage Risks: Swap is based on the full position value, increasing the chance of Margin Calls if the market moves against you.

) Opportunities

Carry Trade: A classic strategy is to “borrow” low-interest currencies (like JPY) and “buy” high-interest currencies (like AUD) to earn positive Swap daily.

Example: Buy AUD/JPY to get positive Swap. If the market is stable, you earn interest plus potential exchange rate gains (but beware of AUD/JPY risk that might decline).

Swap-Free Accounts: Some brokers offer Swap-free accounts (often called Islamic Accounts), which do not accrue Swap regardless of how long you hold the position. Suitable for Swing or Position traders holding for weeks or months. Usually, spreads might be slightly wider in exchange.

Summary and Tips

The impact of Swap on traders depends on their trading style:

• Scalpers/Intraday traders: Little to no effect, as they close positions before the day ends.
• Swing traders: Need to consider Swap because they hold positions for several days.
• Position traders: Should pay the most attention to Swap, possibly choosing assets with positive Swap or using Swap-Free accounts.

A deep understanding of Swap and accurate calculation can help you plan your trades more efficiently and avoid hidden costs that could erode your profits.