What is Swap? How much does it impact trading strategies?

Question

For those entering the world of financial trading, in addition to understanding spreads and commissions, there is a cost often overlooked, especially among new traders. This is called Swap. Knowing what Swap means, its role in trading, and how to calculate it will help you plan your investments wisely and avoid losses from hidden costs.

What does Swap mean? The overnight cost not to be overlooked

Swap is the fee for holding a trading position (Position) beyond 24 hours, known in finance as the “overnight funding fee.” It is a type of interest that arises from holding an order outside the market’s major closing hours.

In practice, when you trade Forex, such as EUR/USD, you are “borrowing” one currency to “buy” another. Each currency in the world has its own interest rate set by the central bank. When you borrow a currency, you pay interest; when you hold a currency, you should earn interest. The difference between these two is your cost or profit.

Why does Swap exist?

The origin of Swap comes from the difference in interest rates between two currencies. Suppose the Euro (EUR) interest rate is 4.0% per year, and the US dollar (USD) is 5.0% per year.

If you Buy EUR/USD (buy EUR and borrow USD), you will earn EUR interest but pay USD interest. The difference is -1.0% per year, meaning you will pay Swap.
If you Sell EUR/USD (borrow EUR and hold USD), you will pay EUR interest but receive USD interest. The difference is +1.0% per year, meaning you will receive Swap.

Since brokers act as intermediaries, they add a management fee into the actual Swap rate. Therefore, even in theory, you should receive a positive Swap, the broker may deduct part of it, reducing your Swap rate. Sometimes, it can be negative on both sides (Buy and Sell).

Types of Swap traders need to know

Positive and Negative Swap

Positive Swap means you receive money into your account the next morning when the interest rate of the asset you “buy” is higher than that of the asset you “borrow.”

Negative Swap is the most common scenario where you pay money out of your account. It occurs when the interest rate of the asset you “buy” is lower, or slightly higher but not enough to cover the fee.

Swap Long vs Swap Short

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

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

The two values are never the same because brokers apply different markups for each direction.

The 3-Day Swap Phenomenon (Swap 3x)

This is a common mistake among beginner traders. Usually, Swap is calculated once per day, but there is one day in the week when you are charged 3 times the Swap.

Why? Most Forex and CFD markets are closed on Saturday and Sunday, but interest in the financial system continues every day, including holidays. Brokers aggregate the Swap charges for Saturday and Sunday into the trading day.

Most often, this is Wednesday night (holding an order from Wednesday to Thursday). The technical reason is that the Forex market has a T+2 settlement cycle (2 business days after trading). When you hold an order from the end of Wednesday, the T+2 settlement falls on Monday (crossing Saturday-Sunday), causing the broker to charge interest for all three days on Wednesday night.

How to check Swap rates before trading

For MT4/MT5 platforms

Go to the Market Watch window
Right-click on the asset (such as EUR/USD)
Select Specification (Details)
A new window will appear. Look for “Swap Long” and “Swap Short”
The numbers are usually shown in Points, which need to be converted accordingly

For other platforms

Private traders and modern brokers often display this information more clearly. Look for sections like “Contract Details” or “Fees” of the asset you’re interested in. If the broker shows Swap as a percentage (%) per night, it will be easier to calculate.

How to calculate Swap costs in detail

Method 1: From Points

Formula: 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
so 1 Point = $1
Calculation: (-8.5) × ($1) = -8.5 USD per night
For a 3-Day Swap: -8.5 × 3 = -25.5 USD

Method 2: From percentage (%) per night

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

where Total position value = (Number of Lots) × (Contract size) × (Market price)

Example

Trading Buy 1 Lot EUR/USD (1 Lot = 100,000 units)
Current EUR/USD 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

Important: Swap is calculated based on the full value (109,000 USD), not just the Margin you put up. If you leverage 1:100, your Margin might be only 1,090 USD, but the Swap cost is 8.72 USD, which is about 0.8% of your Margin per night. This is why Swap can be a hidden cost that is dangerous. Holding an order in a slow market, Swap can eat up your Margin until your account is wiped out.

Opportunities and risks from Swap

Risks

Profit erosion from exchange rate movements The clearest risk is that profit from price movements is eaten away by Swap, leading to very low or even negative net profit.

Pressure to close positions In slow markets, holding a position with Negative Swap results in slow losses every day, forcing traders to close even if their original plan was to hold longer.

Leverage risk Since Swap is based on the full position value, the risk of a Margin Call increases if the market moves against you.

Opportunities

Carry Trade Strategy Traders can take advantage of Positive Swap by borrowing a low-interest currency (like JPY) to buy high-interest currencies (like AUD or others), earning positive Swap daily, e.g., Buy AUD/JPY.

Risks The main risk is that the exchange rate moves unfavorably. If AUD/JPY drops sharply, the loss from price movement may outweigh the accumulated Swap profit over years. This strategy is suitable in stable markets.

Swap-Free Accounts Another attractive option is accounts without Swap charges (some Swap-Free accounts). Some brokers offer this to prevent traders from worrying about overnight costs. Ideal for Swing Traders or Position Traders holding positions for a long time. Brokers often compensate by wider spreads.

Summary

Swap means the overnight cost derived from interest rate differentials. It is not just a floating fee but an actual cost that can be checked through real trading systems. The impact of Swap varies depending on your trading style.

Short-term traders (Scalpers) are hardly affected because they don’t hold positions overnight, but those holding positions for months or years should consider Swap seriously. They may choose to trade only positive Swap pairs or open Swap-Free accounts.

Choosing a platform that provides transparent fee information and clearly displays Swap rates will help you plan better and avoid unexpected hidden costs.