What Is Swap in Forex and How Is It Calculated?

Foreign exchange, or forex, trading involves the simultaneous buying of one currency and selling of another, with the aim of profiting from fluctuations in their relative values. When traders hold a currency position beyond a single trading day, an interest adjustment known as “swap” becomes a factor in their overall transaction outcome.

What is Forex Swap?

Forex swap, also referred to as rollover interest or overnight interest, is an amount paid or earned on positions held open overnight in the forex market. This interest adjustment arises from the fundamental principle that when one currency is bought, another is simultaneously sold, effectively borrowing one currency to purchase the other.

The application of swap rates typically occurs at the end of each trading day, usually around 5 PM Eastern Standard Time (EST), which is considered the market’s daily close for rollover purposes. If a position is held past this cutoff time, even for a few minutes, it is subject to the overnight interest adjustment. This means that positions are “rolled over” to the next business day.

How is Swap Calculated?

The calculation of forex swap involves several components, including the interest rate differential between the two currencies in the pair, the size of the trade (lot size), and the number of days the position is held overnight. Brokers also incorporate their own markup or deduction into the swap rates they quote to traders. The specific interest rates are generally influenced by the central bank rates of the respective countries.

Swap rates are typically expressed in pips or points per lot and can vary among different brokers. Traders can usually find these rates within their trading platform, often listed as “swap long” for buy positions and “swap short” for sell positions. A unique aspect of swap calculation is the “triple swap” or three-day rollover, which usually occurs on Wednesdays. This adjustment accounts for interest over the upcoming weekend, as financial institutions are closed on Saturdays and Sundays.

Types of Swap

There are two primary types of swap in forex trading: positive swap and negative swap. Whether a trader experiences a positive (earned) or negative (paid) swap depends on the interest rate differential of the currency pair being traded and the direction of the position (long or short). A positive swap occurs when buying a currency that has a higher interest rate than the currency being sold. For example, if a trader buys a currency with a 3% interest rate and sells one with a 1% interest rate, they may earn a positive swap.

Conversely, a negative swap occurs when buying a currency with a lower interest rate than the currency being sold. Using the previous example, if the trader bought the currency with the 1% interest rate and sold the one with the 3% rate, they would typically incur a negative swap. Even with a favorable interest rate differential, broker fees or market conditions can sometimes result in a minimal negative swap.

Swap’s Influence on Trade Profit and Loss

Swap rates directly impact a trader’s overall profit and loss (P&L), particularly for positions held overnight. For short-term traders who close positions within the same trading day, swap fees are not a concern. However, for swing traders or those holding positions for several days or weeks, swap can significantly add to costs or, in some cases, contribute to gains.

Negative swap rates can erode profits or increase losses over time, while positive swap rates can add to the trade’s profitability. Understanding the applicable swap rates allows traders to factor these potential costs or gains into their trading plans. While positive swap can be a source of income, especially in strategies focused on interest rate differentials, it is more commonly a cost for many retail traders. Awareness of swap charges is important for managing trade outcomes.