Spread and commission are the first things that come to mind when talking about forex costs — but for traders who hold their positions open for more than a day, swap (overnight interest) is also a frequently overlooked cost item that needs to be taken into account.
What is swap, why does it exist?
In Forex, every trade is essentially buying one currency and selling another. Due to the difference between the interest rates of the two currencies, if you hold your position open past midnight (the cutoff time set by the broker), this interest rate differential is reflected in your account — either as positive (earning) or negative (cost).
For example, if you buy a currency with a low interest rate and sell a currency with a high interest rate, you generally pay negative swap; in the opposite case, you can earn positive swap. This varies depending on the pair and position direction (long/short).
Who is swap important for, and who is it not?
For traders who trade intraday and close positions before the cutoff time, swap is virtually irrelevant. But for traders who hold positions for days, weeks, or even months (swing or position trading), swap can become a significant part of the total cost/gain — especially in currency pairs with a high interest rate differential.
How can you check swap?
- –Check your broker's swap table before opening a position — swap rates vary depending on the direction of the pair and differ from broker to broker.
- –If you are planning a long-term position, factor in the effect of swap on the total cost in advance; a daily rate that seems small can accumulate over weeks.
- –Brokers offering Islamic/swap-free account options may charge a fixed administration fee instead of swap — it is useful for investors who wish to avoid interest-bearing transactions for religious reasons to check this option.
- –On Wednesdays, swap usually increases to 3 times (as compensation for the weekend break) — do not forget this day when calculating your position carrying cost.
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