Swap costs in trading: Hidden costs often overlooked

When considering trading costs, most investors first think of Spread and Commission. But there is another fee that is equally important and often overlooked: Swap. Understanding Swap and how to calculate it will help you plan your trades appropriately and avoid unexpected losses.

Why is Swap Necessary? Origin and Background of This Fee

Basic Understanding

Swap simply refers to the fee for holding a (Position) overnight past midnight. Some call it “Overnight Interest” or “Rollover Fee.” In fact, it is the interest generated from borrowing or holding an asset from today to the next day.

Actual Origin: The Interest Rate Differential

When you trade Forex, such as EUR/USD, you are essentially “borrowing” one currency to buy another:

• Buy EUR/USD: You buy EUR (and earn interest), and borrow USD (and pay interest)
• Sell EUR/USD: You borrow EUR (and pay interest), and hold USD (and earn interest)

Each currency has its own policy interest rate set by its central bank, e.g., USD by the FED (around 5.0% per year), and EUR by the ECB (around 4.0% per year).

Calculation Example:

• Buy EUR/USD: Earn 4.0% (EUR) - Pay 5.0% (USD) = -1.0% (Swap to pay)
• Sell EUR/USD: Earn 5.0% (USD) - Pay 4.0% (EUR) = +1.0% (Swap to receive)

Why do we mostly lose?

Brokers act as intermediaries in this borrowing process. They add a “management fee” into the actual Swap rate. Although theoretically you should receive a positive Swap, the broker may include a fee, reducing the actual Swap you get or turning it negative on both sides.

Swap Rates for Different Assets

Swap for Forex

As explained, it depends on the interest rate differential between the two currencies in the pair.

Swap for CFD Stocks and Indices

Usually based on the interest rates of the currency in which the asset is traded, e.g., US stocks use USD rates minus broker fees.

Swap for Commodities

More complex, based on storage costs or rollover of futures contracts.

( Swap for Crypto Generally based on the Funding Rate in the exchange market, which can be highly volatile.

Types of Swap You Need to Know

) Positive Swap (Swap Plus) You receive extra money each night, occurring when the interest rate of the bought asset is significantly higher than that of the borrowed asset.

Negative Swap ###Swap Minus(

Most common scenario: you pay money every night when the interest rate of the bought asset is lower than that of the borrowed asset.

) Swap Long vs Swap Short

• Swap Long: Swap rate for Buy orders
• Swap Short: Swap rate for Sell orders

Both often differ because borrowing costs vary.

The 3-Day Swap Phenomenon That Beginner Traders Miss

This is a key point often overlooked: on some days of the week, Swap is calculated as 3 times.

Why?

• Forex markets are closed on Saturday-Sunday, but interest accrues daily.
• Brokers aggregate interest for Saturday-Sunday and include it in the trading days.
• Generally, on Wednesday nights (some brokers use Friday), resulting in 3x Swap charges.

Technical reason

Forex settlement cycle is T+2 ###which means 2 business days after trading(. So, if you hold a position from Wednesday overnight to Thursday, the settlement falls on Monday )skipping Saturday-Sunday###. The broker must then account for 3 days of interest.

How to Check Swap Rates Before Trading

( In MT4/MT5

1. Go to Market Watch
2. Right-click on the asset
3. Select Specification
4. Find Swap Long and Swap Short )in Points(

) In Other Platforms Usually displayed in “Asset Details” or “Fee Information” sections, as a percentage rate ###%( per night.

How to Calculate Swap Accurately

) Method 1: Points Units ###MT4/MT5(

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

Example:

• Buy 1 Lot EUR/USD, Swap Long = -8.5 Points
• 1 Pip EUR/USD = $10, so 1 Point = (-8.5) × ($1) = -$8.50 per night
• For 3 nights: $1 -8.50( × 3 = -$25.50

) Method 2: Percentage Rate (%)

Formula: Swap (in money) = ###Total Position Value( × )Swap Rate %(

Example:

• Buy 1 Lot EUR/USD )100,000 units( at 1.0900
• Position value = 1 × 100,000 × 1.0900 = $109,000
• Swap Rate = -0.008% per night
• Swap = 109,000 × )-0.008 / 100( = -$8.72 per night
• 3-Night Swap = -$8.72 × 3 = -$26.16

) Key Point Swap is calculated based on full position value, not on the Margin. If your Margin is only $1,090 but the Swap is $8.72 per night, it represents about 0.8% of your Margin per night. Holding the position for a month could eat into 20-30% of your Margin, even if the price hardly moves.

Opportunities from Leveraging Swap

( Carry Trade Strategy A popular long-term trading strategy that benefits from Positive Swap:

• Borrow low-interest currencies )JPY, CHF(
• Buy high-interest currencies )MXN, TRY### at certain times
• Receive positive Swap daily

Example: Buy AUD/JPY and get positive Swap because AUD has high interest, JPY low.

Risk: Exchange rates may fall sharply, eroding the gains from Swap.

Islamic/Swap-Free Account

Some brokers offer accounts that do not accrue Swap regardless of holding duration, suitable for:

• Muslim traders
• Swing/Position traders holding for weeks/months
• Those wanting to avoid Swap costs

Typically, these accounts have wider Spreads or fixed management fees.

Main Risks of Swap

( Profit Erosion A trade with a $30 profit might only net $4 after Swap fees, making it unprofitable.

) Pressure to Close Positions Holding a Negative Swap position in a sideways market results in slow losses daily. Many traders cannot tolerate this and close early, abandoning their plan.

( Margin Call Risk Increase Since Swap is based on full position value, unfavorable market conditions leading to continuous negative Swap can rapidly reduce your Margin.

Summary

Swap is not just a random fee but a structured cost stemming from the nature of borrowing and holding money. Its impact depends on your trading style:

• Scalper/Day Trader: Swap has little effect due to quick closing.
• Swing/Position Trader: Must consider Swap seriously; may choose Positive Swap or Islamic accounts.
• Carry Trader: Exploits Positive Swap as a primary income source.

Choosing a broker that transparently displays Swap info and planning trades with Swap in mind will help you trade wisely and avoid hidden costs.