What is Swap really, and why is the rate set that way?

Swap is a cost that many beginner traders easily overlook, but it can quietly eat away at your profits every night you hold an open position overnight. For those who don’t know what swap is, think of it as interest that arises from borrowing money to trade. If you understand it well, you can plan your trades more effectively and avoid hidden costs that could erode your profits unknowingly.

Hidden Costs That Cause Trading Losses

In trading, investors face various costs, such as visible spreads and commissions. But beyond those, there are secret costs called swaps, which are often overlooked—especially by beginners unaware that swap is a key factor in calculating net profit.

When you hold an order overnight (beyond market close), your broker will charge a swap. This is based on the difference in interest rates between the two currencies you are trading, or in the case of other assets, based on the financing costs of those assets.

Both Sides of the Interest Are Central to Actual Trading

The origin of swap is more complex than many think, but its core comes from what’s called the “interest rate differential,” especially in Forex trading.

When you trade currency pairs like EUR/USD, in reality, you’re “borrowing” one currency to “buy” another:

• If you open a Buy EUR/USD position: you’re “buying” EUR and simultaneously “borrowing” USD to pay for it.
• If you open a Sell EUR/USD position: you’re “selling” (or “borrowing”) EUR and “buying” (or “receiving”) USD.

All major currencies have their own policy interest rates set by their central banks, such as the US dollar (USD) by the Federal Reserve and the Euro (EUR) by the ECB.

Since you’re “borrowing” one currency, you must pay interest on that borrowed currency. When you “hold” a currency, you should receive interest from it. The difference between these two interest rates is what constitutes the true swap.

Example of Interest Rate Calculation

Suppose the interest rate for the Euro (EUR) is 4.0% per year, and for the US dollar (USD) it’s 5.0% per year:

• If you Buy EUR/USD (buy EUR, borrow USD), you receive EUR interest (4.0%) and pay USD interest (5.0%). The differential is 4.0% - 5.0% = -1.0% annually, meaning you pay swap (negative).
• If you Sell EUR/USD (borrow EUR, hold USD), you pay EUR interest (4.0%) and receive USD interest (5.0%). The differential is 5.0% - 4.0% = +1.0% annually, meaning you receive swap (positive).

From Theory to Platform Figures

In reality, brokers act as intermediaries facilitating this borrowing. They add their own “management fee” or “markup” to the actual swap rate.

Thus, even if theoretically you should receive a positive swap (e.g., +1.0%), the broker might include a fee, reducing your actual received swap to, say, +0.2%, or even turning it negative if their markup is high enough.

This is why the swap rate for long positions (buy) and short positions (sell) are rarely exactly the same.

Swap for Other Assets

This concept extends beyond Forex to other assets:

Stocks and Indices: Swap rates are often based on the interest rates of the currency in which the asset is traded, minus broker fees. For example, US stocks are based on USD interest rates.

Commodities (Gold, Oil): Usually more complex, based on storage costs or rollover costs of futures contracts.

Cryptocurrencies: Often based on funding rates in exchange markets, which can be highly volatile.

How to Calculate the Two Key Figures

Once you understand the origin, you need to know how to find the swap on your trading platform and calculate the actual amount.

Method 1: Using “Points” in MT4/MT5

The simplest formula for trading 1 standard lot (100,000 units):

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

Example:

• You trade a Buy 1 Lot EUR/USD
• You see in specifications that Swap Long = -8.5 points
• For EUR/USD, 1 pip (10 points) = $10 USD
• Therefore, 1 point = $1 USD
• Calculation: (-8.5 points) × ($1) = -8.5 USD

Holding this position overnight costs you $8.5. If it’s a 3-day swap (Wednesday night to Thursday night), multiply by 3: -8.5 × 3 = -25.5 USD.

Method 2: Using “Swap %” in Mitrade

This is more straightforward:

Swap (money) = (Position Value) × (Swap Rate % per night)

Example:

• You buy 1 lot EUR/USD (contract size 100,000)
• Price at calculation time: 1.0900
• Swap rate for buy position: -0.008%
• Step 1: Calculate position value: 1 lot × 100,000 × 1.0900 = 109,000 USD
• Step 2: Calculate swap: 109,000 × (-0.008 / 100) = -8.72 USD

So, you pay $8.72 per night. For 3 nights: -8.72 × 3 = -26.16 USD.

Important Points for Traders

Swap is calculated based on the full position value, not just the margin. For example, with 1:100 leverage, your margin might be only $1,090, but the swap is based on $109,000.

This means that the swap cost can significantly impact your margin, especially if you hold positions for many nights with high leverage. It can gradually deplete your margin even if the underlying asset price remains stable.

The 3-Day Swap and Its Timing

Many beginner traders overlook that swap is usually calculated once daily, but there is a special case: on Wednesday night, the swap is tripled (3× swap).

Why? Because the Forex market closes on Saturday and Sunday, but interest continues to accrue. To account for this, brokers often add the swap for Saturday and Sunday into Wednesday night’s calculation.

When does this happen? Typically, the swap for Wednesday night includes the interest for Saturday and Sunday, so it’s 3 times the usual amount. The exact day may vary depending on the broker and asset.

Types of Swap Traders Need to Know

After understanding the origin and calculation, traders should recognize the main types:

Positive Swap

You receive a small amount of money each night when holding a position, occurring when the interest rate of the asset you buy exceeds that of what you borrow, even after broker fees.

Negative Swap

Most common: you pay money each night, when the interest rate of the asset you buy is lower than that of what you borrow, or when broker fees outweigh the interest differential.

Swap Long and Swap Short

• Swap Long (or Swap Buy): the rate applied when you open a buy position.
• Swap Short (or Swap Sell): the rate for a sell position.

Carry Trade and Swap-Free Accounts

Some traders leverage swap to their advantage:

Carry Trade Strategy

This involves borrowing in low-interest currencies (like JPY or CHF) and buying high-interest currencies (like TRY or MXN). The goal is to earn positive swap income daily.

Example: Buying AUD/JPY, where AUD has a higher interest rate than JPY, can generate positive swap income if the rates are favorable. But beware: currency fluctuations can wipe out gains.

Swap-Free Accounts (Islamic Accounts)

Designed for traders who cannot accept interest charges due to religious reasons, these accounts do not charge or pay swap. They are suitable for long-term traders and swing traders. Brokers often compensate by wider spreads or fixed fees.

Managing Risks and Planning Finances

The main risk with swap is that it can silently eat into your profits or even your capital if you hold positions long-term with high leverage.

Tips:

• Calculate swap costs before opening positions.
• Be aware of the 3-day swap on Wednesdays.
• Use appropriate leverage.
• Consider swap-free accounts for long-term trading.

Summary

What is swap really? It’s a cost arising from borrowing money to trade, reflecting the interest rate differential between assets or currencies.

For short-term traders, swap has minimal impact since positions are closed quickly. But for long-term traders, it can significantly affect profitability—sometimes even leading to losses if not managed properly.

Choose brokers transparent about their fees and display swap information clearly. Planning your trades with full awareness of swap costs helps avoid surprises and ensures you understand that swap is a normal part of trading costs, not some hidden broker trick.