2025-09-22
A swap in forex is the overnight interest traders pay or earn for holding positions past rollover. It affects trading by adding costs or credits, which can reduce profits, increase expenses, or even shape long-term strategies like carry trades.
While the idea may sound straightforward, the mechanics of swap go beyond a simple overnight fee. The way it is applied, the factors that influence its size, and the impact it can have on different trading styles are often misunderstood.
This article explains what is swap in forex, how it's calculated, the risks it brings, and the ways traders can manage or even use it to their advantage.
In retail forex, a swap—sometimes called a rollover fee—is the interest paid or earned for holding a position overnight. It arises because currencies are always traded in pairs, each tied to a different central bank interest rate.
If you hold the currency with the higher rate, you may earn interest.
If you hold the one with the lower rate, you may have to pay it.
On the institutional side, the term "currency swap" refers to a broader financial agreement: two parties exchange principal and interest payments in different currencies, then reverse the exchange at an agreed future date.
These deals are often used by corporations or governments for funding and hedging.
1) Overnight holding
If you keep a trade open past your broker's rollover time (commonly 5 pm New York time), you will either receive or pay a swap.
2) Interest rate differential
The broker calculates the difference between the two currencies' interest rates. Your position direction (long or short) determines whether the balance is in your favour or against you.
3) Triple swaps
Because markets close at weekends, brokers apply a "triple swap" charge or credit midweek (often on Wednesday) to cover the two non-trading days.
Wholesale FX and Institutional Currency Swaps
Beyond retail trading, currency swaps are tools used by banks, corporations, and central banks.
These agreements involve exchanging cash flows in two currencies, often for years. A company with dollar liabilities but euro income, for instance, may use a currency swap to align cash flows and reduce risk.
1) Overnight Swap (Rollover Fee):
The most common for retail traders, applied daily.
2) Currency Swap (Cross-Currency Agreement):
Long-term arrangements in wholesale markets, involving principal and interest.
3) Swap-Free Accounts:
Offered by some brokers, these accounts replace overnight interest with fixed fees to accommodate religious requirements or traders who wish to avoid interest-based costs.
Interest rate differential – The heart of swap calculation.
Broker policy – Some brokers add mark-ups, so rates differ widely.
Trade size and direction – A larger position means a larger swap, whether cost or income.
Market conditions – Central bank decisions and liquidity shifts directly influence swap values.
Swaps are not arbitrary. Brokers often publish daily swap rates, and many provide calculators so you can estimate charges before trading. The formula generally factors in the interest rate spread, the notional value of the position, and the number of days.
Example
If you go long on a currency pair where the base currency pays 5% interest and the quote currency pays 2%, you may receive a credit, minus broker adjustments. Reverse the position, and you could face a charge.
Managing Swap Costs
Choose pairs wisely: Seek out currencies where the differential works in your favour.
Close before rollover: Day traders often exit positions to avoid overnight charges.
Use swap-free accounts: These replace interest charges with a flat fee or alternative model.
Negative surprises: Many traders expect to earn a credit, only to discover fees outweigh gains.
Opaque broker practices: Swap policies vary—always check broker disclosures.
Economic shifts: Interest rate changes can turn a positive swap into a negative one overnight.
Carry trade illusions: While swaps may be positive, the underlying currency can depreciate, wiping out gains.
Swaps are not just background noise—they influence trading strategies.
1) Carry Trade:
Traders borrow in a low-interest currency and invest in a higher-interest one. Swaps provide income, but risks lie in exchange rate volatility.
2) Corporate Hedging:
Businesses protect themselves against currency risk through long-term swaps.
3) Speculation:
Some traders attempt to profit from shifts in interest rate expectations, not just price movement.
1. Can swaps ever be positive?
Yes. If you are long on the currency with the higher interest rate and short the one with the lower, the differential may result in a net credit.
2. When exactly is the swap applied?
Usually at rollover time, which is broker-specific but commonly set at 5 pm New York time.
3. What is a swap-free account?
It is an account type where no overnight interest is charged or credited, often designed for traders following Islamic finance principles. Brokers may charge alternative fees to compensate.
4. How should I include swaps in my trading plan?
Factor them into long-term strategies, check rates daily, use calculators, and monitor interest rate announcements from central banks. For short-term trades, avoiding overnight positions may be more cost-effective.
Swaps may seem like small charges or credits, but they carry real significance. They can steadily erode profits if ignored, or serve as a source of income when used strategically.
By understanding how swaps are calculated, monitoring broker policies, and integrating them into your trading plan, you can turn an often-overlooked detail into a meaningful part of your forex journey.
Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
