Swap costs that wipe out profits: Preventive measures for traders

For traders who hold orders for more than one day, swaps are a cost that must be truly considered. Unfortunately, they are often overlooked, especially by beginners. The problem is that swap costs are not always clearly visible on every screen; they are quietly deducted every night you hold a position. This is why a complete trading plan must include swap considerations.

What is Swap? The Hidden Cost Often Overlooked by Beginners

Swap is a fee you pay for holding a trading position overnight. In financial terms, it’s called “Overnight Interest” or “Rollover Fee.” Simply put, it’s the interest accrued from keeping an order open beyond the trading day.

The reason swap costs exist is more complex than it seems at first glance. Essentially, when you open a trading position, you are borrowing one currency to buy another. During the period you hold this order, you pay interest on the borrowed currency and earn interest on the currency you hold. Swap is the difference between these two interest rates.

How It Works: The Interest Rate Differential Behind Swap

When you trade currency pairs like EUR/USD, you are “buying” EUR and “borrowing” USD to pay for it, or vice versa.

If you open a Long EUR/USD position: You buy EUR and borrow USD.
If you open a Short EUR/USD position: You borrow EUR and hold USD.

Every currency has its own interest rate set by its central bank—e.g., the European Central Bank (ECB) for EUR, or the Federal Reserve (Fed) for USD.

Let’s consider a hypothetical scenario:
Euro (EUR) interest rate: 4.0% per year
US dollar (USD) interest rate: 5.0% per year

• If you buy EUR/USD: You earn EUR interest (4.0%) but pay USD interest (5.0%), resulting in a -1.0% annual difference, meaning you pay swap.
• If you sell EUR/USD: You pay EUR interest (4.0%) but earn USD interest (5.0%), resulting in a +1.0% annual difference, meaning you receive swap.

In reality, brokers acting as intermediaries for these loans will add their own “management fee” or “markup” into the actual swap rate. As a result, even if theoretically you should get a positive swap, the broker might deduct fees, reducing or turning the swap negative.

Types of Swap and How to Calculate Actual Costs

Swaps come in different types, and understanding these differences is crucial for planning your trades.

Positive Swap: You receive extra money each night you hold the position, resulting from the higher interest rate of the asset you hold compared to the borrowed asset.

Negative Swap: More common; you pay out a small amount each night, because the interest rate of the borrowed asset exceeds that of the asset you hold.

Long and Short Swap: Swap rates are set separately for buying and selling; they are never equal due to different calculation methods and broker fees.

3-Day Swap: A phenomenon often missed by beginners. Usually, swap is calculated daily, but during one week, you are charged three times. Why? Because most Forex markets are closed on Saturday and Sunday, but interest continues to accrue globally. Brokers sum up the swap for the non-trading days into the next trading day, often on Wednesday night (for positions held from Wednesday to Thursday). This is due to the T+2 settlement system in Forex.

How to Calculate the Real Swap Cost

Method 1: From Points (on MT4/MT5 platforms)

The simplest formula for 1 Standard Lot (100,000 units):
Swap (in money) = (Swap Rate in Points) × (Value of 1 Point)

Example:
If you buy 1 lot EUR/USD and the Long Swap = -8.5 points, and 1 point = $1 USD, then:
Swap = -8.5 USD per night.
If it’s a 3-Day Swap, total = -25.5 USD.

Method 2: From Percentage per Night (modern platforms)

Swap (in money) = (Total position value) × (Swap % rate)

Example:
Buy 1 lot EUR/USD at 1.0900, position value = 109,000 USD.
If Long Swap = -0.008% per night, then:
Swap = 109,000 × (-0.008 / 100) = -8.72 USD.

Key point: Swap is calculated based on the full position size, not just the margin you put up. If you leverage 1:100 and put up only 1,090 USD margin, the swap cost of 8.72 USD still impacts your margin significantly—about 0.8% per night. Over months, this can eat into your margin and profits.

Swap-Free Accounts and Carry Trade Strategies

Swap-Free (Islamic) Accounts: These are options for traders who want to hold positions long-term without paying swap fees, as interest is prohibited in Islamic finance. Brokers offer these accounts, which do not accrue swap regardless of how long you hold. Ideal for Swing or Position Traders who believe in holding for weeks or months. The trade-off is that Swap-Free accounts may have wider spreads or fixed fees.

Carry Trade: A strategy that exploits positive swaps. It involves “borrowing” a low-interest currency (like JPY) to “buy” a high-interest currency (like MXN or TRY), earning positive swap interest daily.

Example:
Buy AUD/JPY (buy AUD, borrow JPY). If the Long Swap is positive, you accumulate swap income daily. But beware: exchange rate movements can offset gains. If AUD/JPY drops significantly, currency losses may outweigh the accumulated swap.

Risk Management: Turning Swap into an Ally

Step 1: Check before opening a trade
On MT4/MT5, go to Market Watch → Right-click asset → Specification → View Swap Long and Swap Short.
On modern platforms (e.g., Mitrade), look for overnight fee info, often shown as a percentage per night.

Step 2: Calculate total impact
If you plan to hold a position for 5 days (including one 3-Day Swap), multiply the nightly swap by 5, then add the 3-Day swap. Keep this total below 1% of your expected profit.

Step 3: Use appropriate strategies

• Day Traders: Swap usually doesn’t matter much.
• Swing Traders: Hold only positions with positive swap or use Swap-Free accounts.
• Position Traders: Consider Carry Trade or Islamic accounts, as swap costs can significantly reduce profits.

Step 4: Choose a broker
Select brokers transparent about swap rates, with clear platform info before opening trades. This helps avoid surprises.

Summary

Understanding and managing swap correctly is vital for effective trading planning. Swap isn’t just a random fee; it’s based on solid financial principles. Its impact depends on your trading style. Short-term traders are less affected, but those holding positions for weeks or months must plan carefully.

Smartly using Swap-Free accounts or Carry Trade strategies can help prevent costs from quietly eroding your profits. Take a few minutes before opening trades to check swap rates—you’ll thank yourself later.