How is the Swap fee calculated: The complete guide for traders

For traders in the financial markets, besides spreads and commissions, a often-overlooked cost is the Swap, which can quietly eat into your profits. Understanding how Swap is calculated and its impact on trading will help you plan smarter and avoid losing profits to this hidden cost.

What is Swap and Why Does It Occur?

Swap is a fee for holding a trading position overnight, also called “Overnight Interest” or “Rollover Fee” in financial publications. Essentially, it’s interest accrued from holding your trade position beyond the trading day (during market close).

Origin of Swap: Interest Rate Differentials

Swap arises from the nature of trading: when you open a trade, you are “borrowing” one currency to “buy” another:

• If you Buy (Long) EUR/USD: You are “buying” EUR and simultaneously “borrowing” USD to pay for it.
• If you Sell (Short) EUR/USD: You are “borrowing” EUR and “holding” USD.

All currencies have their own interest rates set by their central banks (e.g., US dollar by the Fed, Euro by the ECB). When you “borrow” a currency, you pay interest on it; when you “hold” another currency, you earn interest. Swap is the net difference between these interest payments.

Simple Calculation Example

Suppose EUR interest rate is 4.0% annually, USD is 5.0% annually:

• Buy EUR/USD (EUR 4.0%, borrow USD 5.0%): difference = 4.0% - 5.0% = -1.0% per year → you pay Swap (negative)
• Sell EUR/USD (borrow EUR 4.0%, hold USD 5.0%): difference = 5.0% - 4.0% = +1.0% per year → you receive Swap (positive)

In reality, brokers also charge their own fees, so the actual Swap received or paid after deductions is usually less than the theoretical calculation.

Types of Swap Traders Encounter

Positive and Negative Swap

Positive Swap: You earn a small amount each night for holding the position, occurring when the interest of the asset you hold exceeds that of what you borrow.

Negative Swap: More common, where you pay out each night, when the interest of the asset you hold is lower than that of what you borrow.

Swap Long and Swap Short

Brokers typically specify Swap rates separately for long and short positions:

• Swap Long: Rate applied to buy orders
• Swap Short: Rate applied to sell orders

3-Day Swap: The Hidden Fee

A key point many beginner traders overlook: every week, there is a day when you pay 3 times the usual Swap (3x Swap).

Why? Because the Forex and CFD markets are closed on Saturday and Sunday, but interest continues to accrue daily. Brokers aggregate the Swap for Saturday and Sunday into the next trading day, usually Wednesday night (due to T+2 settlement in Forex).

For example: if you hold a position from Wednesday, the settlement cycle crosses the weekend, so you pay Swap for 3 days (Friday, Saturday, Sunday) in one night (Wednesday).

How to View Swap Rates on Trading Platforms

On MT4/MT5

1. Go to Market Watch (asset list)
2. Right-click the asset
3. Select Specification
4. Find “Swap Long” and “Swap Short”
5. The numbers are usually in Points, which require conversion

On Modern Platforms (e.g., Mitrade)

1. Select the asset
2. Check the “Introduction” section on the right
3. Look for “Overnight Fees”
4. Mitrade displays Swap as a percentage (%) per night, making calculation easier

How is Swap Calculated: Two Main Methods

Swap calculation depends on how your broker displays the rate—either in Points or in Percentage.

Method 1: Using “Points”

Basic formula for 1 standard lot (100,000 units):

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

Example:

• You trade Buy 1 Lot EUR/USD
• Swap Long = -8.5 Points
• For EUR/USD: 1 Pip = 10 Points = $10 USD
• 1 Point = $1 USD
• Swap per night = (-8.5) × ($1) = -$8.50 USD
• For the 3-Day swap (Wednesday night): -$8.50 × 3 = -$25.50 USD

Method 2: Using Percentage (%)

This is more straightforward:

Swap (money) = (Position Size) × (Swap Rate %) / 100

Where:

• Position Size = (Number of Lots) × (Contract Size) × (Price)
• Swap Rate % = broker’s specified rate

Example:

• Buy 1 Lot EUR/USD at 1.0900
• Swap rate = -0.008%
• Step 1: Total value = 1 × 100,000 × 1.0900 = 109,000 USD
• Step 2: Swap = 109,000 × (-0.008 / 100) = -8.72 USD
• For 3 nights: -8.72 × 3 = -$26.16 USD

Important Considerations

Swap is calculated based on the full position value, not just your margin. Using leverage (e.g., 1:100), you might only put up a small margin (e.g., $1,090), but pay Swap on the full position size, which can quickly eat into your profits if the market moves sideways.

Risks and Opportunities of Swap

Risks

• Profit Erosion: Gains of $30 can be reduced to $4 after paying Swap for 3 nights.
• Sideways Markets: When prices stagnate, negative Swap gradually reduces your capital.
• Leverage Impact: Higher leverage amplifies Swap costs relative to your margin.

Opportunities

• Carry Trade: Borrowing low-interest currencies (like JPY or CHF) to buy high-interest currencies (like AUD or TRY) can generate positive Swap daily.

• Example: Buying AUD/JPY to earn daily positive Swap, potentially 0.05%-0.10% per night.

• Caution: Carry trades carry risk if the exchange rate moves against you, potentially offsetting gains from Swap.

• Swap-Free Accounts: Many brokers offer Islamic accounts that do not charge Swap, suitable for long-term holding, with spreads or fixed fees replacing Swap costs.

Summary

Swap is not just a floating fee; it’s a significant part of trading costs that can impact your profitability. Understanding how Swap is calculated helps you:

• Decide on holding periods
• Choose the right position direction
• Incorporate Swap into your profit/loss calculations
• Select brokers with transparent Swap policies

Whether you’re a short-term swing trader or a long-term position trader, paying attention to Swap and leveraging its opportunities can prevent it from becoming an unseen cost eroding your gains.