If you want to learn how to trade forex, then you’ve probably heard the term “swap”, or “FX swap”.
But if you’re not 100% sure about it, this post is for you.
One of the hardest things to understand is the swap concept, as it’s a bit complex.
So in this post, I’m going to explain exactly what a swap is and why it’s so important for beginners.
It’s going to explain everything about this topic, including:
- What is a swap in forex trading
- How you can benefit from them
- How you can avoid them And some examples to help you understand.
This is one of the hidden costs when trading, so it’s important you understand this.
Let’s dive in.
What Is A Swap in Forex Trading?
A common question when beginners start out is:
What does swaps mean in trading?
Most people normally find out for the first time AFTER they see it applied to their fees and charges.
(Hopefully, that’s not you!)
So a swap in forex trading is the interest that you pay or receive for keeping an open trade overnight.
These swaps come in two forms:
Long swaps – these are used when you have an open position that you have bought (gone long) and kept overnight.
Short swaps – these are used when you have an open position that you have shorted (gone short) and kept overnight.
Swaps are applied every night, so the longer you keep a position open the more swap is paid or received.
The way fx swaps are presented are in pips per lot.
Most brokers will display the swaps of the currency pair on the asset’s charges page.
You can also see it in the trades summary when you view your charts.
The trades summary shows the number of pips swapped for each currency pair and it also shows how much was received or paid.
It is important to understand because it’s a stealth tax that many traders don’t even consider when holding a position overnight.
How do you benefit from swaps in forex?
As discussed, you can either pay or receive fx swap fees for holding an asset overnight.
Depending on whether you are long or short, you could receive the swap instead of paying it.
Now, this is beneficial if you are trading in the right direction & receiving the swap.
However, more often than not – receiving the swap makes little difference with your trading – it’s just a bonus.
With that being said, there is a type of strategy in forex that is like investing in stocks for dividend yields.
This is known as carry trading.
Carry trading is a strategy that is used to exploit the interest differentials between two currency pairs and pocket the swap fees.
It’s a complicated strategy that I will go into another post.
Make sure to be on the lookout for it.
So how do you benefit?
When you hold a position overnight, you pay an interest on the currency you are selling and receive interest on the currency you are holding.
Should the interest of the currency you hold receive higher interest than the currency you are selling, you will pocket the difference and this will also accumulate every evening you hold onto the position.
This is known as receiving a positive swap.
How do you avoid swap in forex?
The concept of avoiding swap in forex trading is simple.
You ONLY pay (or receive swap) when holding a position overnight.
So if you close your position before the end of the day, then you will not pay or receive the swap and thus avoid swap in forex.
To avoid the swap, you will need to review this with your broker and ask when the “rollover point” of the forex contract is.
They should give you a rough time (it varies from day to day), but it’s normally around 21:00 GMT when the rollover occurs but if you close your position before this time, you will avoid swap in forex.
It’s really that simple.
What is swap cost in forex?
If only things could be as straightforward, then understanding what is a swap cost in forex would be easy.
Unfortunately, the swap cost in forex differs from currency pair to currency pair.
This is due to several factors:
- variable interest rates charged
- different countries interest rates differentials between countries
- difference in value change of the currency you are holding
However, you can keep on top of all this by reviewing the details on your brokerage platform where this information must be shown so you can make an informed decision.
What is FX swap example?
Let’s get some confusion out the way and look at what is fx swap and how it affects our trading.
Let’s use the example of EURUSD.
Please note the following swap figures are examples, to find out accurate fx swaps please check with your broker.
The short swap value is 0.1%
The long swap value is -0.5%
Long swap example
So if you have a long position open (buying Euros and selling dollars), you will have to pay the long swap value which is 0.5% per lot, per night (rollover).
So if you were long on Monday and closed the position on Tuesday, you would have had to pay 1 nights worth of long swap.
This would work out as:
1 lot (100,000 units) x (0.5 x 0.0001 pip) = $5 long swap fee.
This would automatically be deducted from your open position (just like the spread).
If you kept the position open until Wednesday, that would be two nights worth of long swap and therefore you would have paid $5 per night for holding the 1 lot EURUSD open, thus owing $10 in long swap fees.
Short swap example
In this instance, you have a short position open (buying dollars and selling euros), you will receive the short swap value which is 0.1% per lot, per night.
So if you were short on Tuesday and closed the position on Wednesday, you would have received 1 nights worth of short swap.
This means your position would receive:
1 lot (100,000 units) x (0.1 x 0.0001 pip) = $1 short swap fee.
Thus receiving $1 for keeping the position open overnight.
If you kept the position over two nights, you would have $2 in short swap fees received.
Conclusion: What Is A Swap in Forex Trading?
There you have it, a quick summary of what a swap is and how it could help you.
Make sure you review the swaps with your broker to get an accurate picture.
What was the most valuable part of this article?
If you want to learn more, check out some of the other articles on this site: