What is Swap? Why do traders need to pay attention to this?

Costs Traders Often Overlook

Many traders focus on Spread (Open-Close Cost) and Commission but miss the “main villain” that eats into profits – which is Swap overnight fees.

For those who hold positions for days, weeks, or months, Swap is not a trivial matter. It can turn a $50 profit into just $5, or worse.

Swap vs Swop - The Difference You Need to Know

In the financial world, Swap and Swop are often used interchangeably (Swap is American spelling, Swop is British), but their meanings depend on the context:

• Swap in CFD/Forex context: The fee for holding a position overnight (Overnight Interest)
• Swap in Finance/Investment context: An exchange (such as Interest Rate Swap, Currency Swap)

For traders, think of Swap as “interest” collected every night, not an exchange of goods.

Origin of Swap - More Complex Than You Think

It comes from “borrowing money”

When you Buy EUR/USD, in reality you are:

• “Buying” EUR (paying money)
• “Borrowing” USD from your broker to pay for the purchase

Every currency has its own “policy interest rate” set by its central bank:

• USD (FED): 5.0% per year
• EUR (ECB): 4.0% per year
• JPY (BOJ): near 0% per year

Basic formula

Swap = Interest earned - Interest paid + Broker fee

Real example:

• Buy EUR/USD = Earn EUR interest (4.0%) - Pay USD interest (5.0%) = -1.0% per year
• But the broker adds their Spread, so it might be -1.5% or -1.2%
• Sell EUR/USD = Earn USD interest (5.0%) - Pay EUR interest (4.0%) = +1.0% per year

This explains why Swap Long and Swap Short are not always equal.

How to View Swap Values - Which Method Is Clearer

How to check on MT4/MT5 platform

1. Market Watch → Right-click EUR/USD
2. Specification
3. Find the lines “Swap Long” and “Swap Short”
4. The numbers are in Points; you need to convert accordingly

How to check on other platforms

Modern brokers often display as % per night, making calculation easier, e.g., -0.008% per night.

How to Calculate Swap Accurately

Method 1: From Points unit (MT4/MT5)

Formula: Swap (Money) = Points × Value of 1 Point

Example:

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

Method 2: From % per night

Formula: Swap (Money) = Position value × Swap rate %

Example:

• Buy 1 Lot EUR/USD = 100,000 EUR
• EUR/USD price = 1.0900
• Total value = 100,000 × 1.0900 = 109,000 USD
• Swap Long = -0.008% per night
• Swap = 109,000 × (-0.008 ÷ 100) = -8.72 USD per night
• For 3-Day Swap: -8.72 × 3 = -26.16 USD

Key Point Many Miss

Swap is calculated based on the full value (109,000 USD), not the Margin you put up.

If using 1:100 leverage:

• Margin required: about 1,090 USD
• Swap per night: 8.72 USD
• As a percentage of Margin: (8.72 ÷ 1,090) × 100 = 0.8% per night

This is why Swap can be “dangerous” when using high leverage.

Opportunity - Swap Is Not Just a Cost

Carry Trade Strategy (Earning from interest differentials)

Concept: Borrow low-interest currency, buy high-interest currency, and earn the Swap premium

Example:

• Buy AUD/JPY = buy AUD (interest 4%+), borrow JPY (interest 0%)
• If no significant fees, you earn positive Swap every night
• Carry Trade was popular during economic downturns

Risk: The AUD/JPY price might plummet, and exchange rate losses could outweigh accumulated Swap profits.

Swap-Free Account (Islamic Account)

Some brokers offer:

• No Swap regardless of holding duration
• Suitable for Swing Traders, Position Traders, Muslim traders
• Cost of exchange: Broker may add Spread or fixed fee

The 3-Day Swap - A Key Secret

Why is Wednesday’s Swap 3 times?

Forex markets close from Saturday to Sunday, but interest accrues throughout the week.

Additional info: Forex settlement cycle T+2:

• Trade on Wednesday → settle on Friday
• Holding from Wednesday to Thursday → settlement on Monday (skipping weekends)
• Brokers combine 3 days’ interest into Wednesday night

Note: Some brokers use Friday or other days; always check their conditions.

CFD and Other Assets - Swap Is Not Only Forex

Stocks/Indices (Stocks/Indices)

• Swap depends on the interest rates of the traded currency
• US stocks → based on USD interest rates

Commodities (Commodities)

• Gold, Oil: Swap is more complex
• Based on storage costs (Storage Costs)
• Based on rollover of futures contracts

Cryptocurrencies (Cryptocurrency)

• Swap depends on “Funding Rate” in the market
• Highly volatile (sometimes 0.01% per 8 hours, sometimes over 1%)

Risks of Swap - Truly Dangerous

1. Quietly Eating Into Profits

You buy EUR/USD expecting prices to rise, but:

• Market moves sideways for 2 weeks
• Swap is negative -8.5 USD/day
• 14 days (2 weeks) = -119 USD
• Even if prices hardly move, your profit disappears into thin air

2. Forcing Position Closure

Example: Swing Trader holding AUD/USD with Negative Swap -10 USD/day

• Ranging market for 5 days
• Total Swap = -50 USD
• Pressure to close even before original plan succeeds

3. Margin Call Risk

Using 1:100 leverage + high negative Swap + adverse market movement = gambling formula

Swap vs Spread - Which Is More Dangerous?

• Spread: Paid immediately when opening a position
• Swap: Paid gradually each night, potentially more costly over time

Comparison:

• EUR/USD Spread: 1-2 pips (1-20 USD per Lot)
• EUR/USD Swap: -8.5 USD/day = -60 USD/week

Holding over a week makes Swap costs significantly different.

Summary - Plan Wisely

For Short-term Traders (Scalper/Day Trader)

Swap has minimal impact; no need to worry.

For Mid-term Traders (Swing Trader)

Calculate Swap carefully; otherwise, profits will be eroded.

For Long-term Traders (Position Trader)

Choose:

• Directions with positive Swap
• Swap-Free accounts
• Carry Trade strategies if market conditions favor

Most Important: Select a broker transparent about Swap rates, clearly displayed, so you can accurately calculate costs without hidden fees.

Investing involves risks and may not be suitable for everyone.