Swap cost is an implicit cost that traders need to understand

Swap fee is one of the costs often overlooked by many traders, even though it can quietly eat into profits every night you hold an open position in your portfolio. To gain a deeper understanding, learn how overnight fees work and how they impact your trading statistics.

Understanding Swap - Overnight Interest in Trading

Swap, also called “overnight interest” or “Overnight Interest” in finance, is the fee incurred when you hold an order overnight, meaning beyond the natural market close each week.

For beginner traders, this side fee is often ignored, but in the long run, it can subtly reduce profits. Those holding positions for weeks or months should be aware of the significant impact of this fee.

Interest Rate Differentials: Why Swap Matters

When you trade currency pairs like EUR/USD, you’re essentially doing two things simultaneously: “buying” one currency and “borrowing” the other.

When you open a long (buy) EUR/USD position, you’re “buying” euros and “borrowing” dollars to pay for the purchase. Conversely, when you open a short (sell) EUR/USD position, you’re “borrowing” euros and “buying” dollars back.

Each currency has its own policy interest rate set by its central bank (e.g., Federal Reserve for USD, ECB for EUR). Borrowing a currency incurs interest payments, while holding a currency earns interest.

Swap is the difference between these two interest rates, calculated as a fee each night.

Why Most Traders Bear This Cost

In theory, if you buy EUR/USD when euro interest rates are higher than US dollar rates, you should receive a positive swap (money credited to your account) every night. However, brokers facilitate this borrowing and often add their own “markup” to the actual rate.

As a result, even if theoretically you should earn money, the broker’s markup can significantly reduce or even turn the swap into a negative value for both long and short positions.

This explains why swap rates for long (buy) and short (sell) positions differ, and why most traders end up “paying” this fee regardless of the position direction.

Swap on Stocks, Commodities, and Other Assets

The concept of overnight fees isn’t limited to Forex. It extends to other assets traded via CFDs:

Stocks and Indices are usually based on the interest rates of the currency in which the asset is traded, e.g., US stocks are linked to USD interest rates plus broker holding fees.

Commodities (gold, oil, agricultural products) are more complex, often based on physical storage costs or the rollover of futures contracts (when the market shifts from an old month contract to a new one).

Cryptocurrencies on contract platforms often rely on “Funding Rates” set by exchanges, which can be highly volatile and change according to market sentiment.

Types of Swap and How the 3-Day Swap Works

There are various types of swaps, but the main ones traders should know are:

Positive Swap: You receive a small amount of money each night for holding the position, occurring when the interest of the “bought” asset exceeds that of the “borrowed” asset significantly (even after broker fees).

Negative Swap: The most common scenario, where you pay out money each night, happening when the interest of the “bought” asset is lower than that of the “borrowed” asset, or slightly higher but not enough to cover broker fees.

3-Day Swap Phenomenon: A common pitfall for beginners. Usually, swaps are calculated daily, but there is one day per week where the swap is tripled. This occurs because most Forex markets are closed on Saturday and Sunday, but interest continues to accrue. Brokers combine the swap for Saturday and Sunday into the Wednesday night calculation.

This relates to the T+2 settlement cycle in Forex (trade settlement 2 business days after the trade). Holding an order from Wednesday to Thursday means “borrowing” money over the weekend.

How to Check and Calculate Swap on Your Platform

Knowing the swap fee before trading is essential. How to check varies by platform:

On standard platforms (MT4/MT5), go to Market Watch, right-click on the asset, select Specification, and find Swap Long and Swap Short (usually in Points).

On newer platforms (like Mitrade), brokers display “Overnight Fees” clearly as a percentage (%) per night, making it easy to understand and calculate.

Swap calculation methods depend on how the broker displays the data:

Method 1: From “Points” (e.g., MT4/MT5)

• Formula: Swap = (Swap Rate in Points) × (Value of 1 Point)
• Example: If you buy 1 lot EUR/USD with Swap Long = -8.5 points and 1 point = $1, you lose $8.5 per night (or $25.5 for a 3-day swap).

Method 2: From “Percentage” (e.g., Mitrade)

• Formula: Swap = (Total position value) × (Swap rate %)
• Example: Buy 1 lot EUR/USD (100,000 units) at 1.0900, value = $109,000. If Swap = -0.008%, you lose $8.72 per night.

Note that swap is calculated on the full position value, not just the margin. Using 1:100 leverage, you might have a margin of $1,090 but pay $8.72 in swap per night (~0.8% of margin). This is why swap is an insidious hidden cost.

Carry Trade Strategy and Swap-Free Accounts

Traders can manage swap costs through:

Carry Trade: Engaging in trades to earn swap income by “borrowing” low-interest currencies (like JPY) to “buy” high-interest currencies (like MXN or TRY). The goal is to collect positive swap income daily. For example, buying AUD/JPY to earn high Australian interest and paying low Japanese interest.

Risks include adverse exchange rate movements, which can outweigh swap gains over time.

Swap-Free Accounts (or Islamic Accounts): Designed to eliminate swap costs regardless of how long positions are held. Suitable for swing traders or those holding positions for months.

Brokers compensate by widening spreads or charging fixed fees for holding positions beyond certain days.

Summary: Managing Swap for Better Trading Performance

Swap is a natural cost of holding overnight positions in financial markets. Its impact varies depending on your trading style.

Scalpers who open and close positions within minutes are minimally affected. However, swing traders or position traders holding for weeks or months must consider swap costs seriously.

Choosing a transparent platform that clearly displays swap information helps you plan and calculate true costs before investing. Alternatively, using swap-free accounts or strategies like carry trading can turn swap costs into income rather than expenses.