Everything About Swap or Overnight Interest in Forex Trading

What Is Swap (Overnight Interest) in Forex?

A Comprehensive Guide to Understanding Overnight Position Holding Costs

In the world of forex trading, beyond price fluctuations, there are hidden costs that can significantly affect a trader’s final profit or loss. One of the most important—and often overlooked—of these costs or incomes is the swap, also known as overnight interest. This concept plays a vital role in trading strategies, especially for those who hold positions overnight.

What Is a Swap?

A swap in forex refers to the interest that is either paid or received for holding a trading position overnight. This interest arises from the difference in interest rates between the two currencies in a currency pair.

Simply put:
When you buy or sell a currency pair and keep it open until the end of the trading day (usually 00:00 server time), a small fee or income may be applied to your account depending on the interest rate differences.

Why Does a Swap Exist?

Each currency belongs to a country with a specific interest rate. In forex trading, when you buy one currency and sell another, you are effectively:

• Borrowing the currency you sell (and paying interest),
• Depositing the currency you buy (and earning interest).

If the interest rate of the currency you bought is higher than the one you sold, you may earn a swap. Otherwise, you pay it.

Simple Example

Suppose you buy the currency pair AUD/JPY:

• Interest rate of Australia (AUD): 4.35%
• Interest rate of Japan (JPY): 0.10%

Since AUD has a higher interest rate than JPY, you may receive positive swap.

However, if you sell AUD/JPY (i.e., buy JPY and sell AUD), you would likely pay negative swap due to borrowing AUD with a higher rate.

Types of Swap

1. Positive Swap: When the interest rate of the currency you bought is higher than the one you sold — you receive interest.
2. Negative Swap: When the interest rate of the currency you bought is lower — you pay interest.

When Is Swap Applied?

Swap is calculated at the end of each trading day (typically 00:00 server time).

But note:
• On Wednesday night, swaps are usually tripled, because forex trades settle two business days later, and Wednesday positions carry over the weekend (Saturday and Sunday are non-trading days).

How to View Swap in MetaTrader?

To check swap values in MetaTrader:

1. Right-click the desired currency pair in the Market Watch window.
2. Select “Specification”.
3. A window will show:

• Swap Long: Swap for buy positions
• Swap Short: Swap for sell positions

What Is a Swap-Free (Islamic) Account?

Some brokers offer Swap-Free or Islamic accounts for Muslim clients, where no overnight interest is applied. However, these accounts often have specific conditions and may only be interest-free for a limited time.

Is Swap Significant?

• For short-term traders (day trading), swap typically has minimal impact.
• For long-term traders (swing or position trading), swap can substantially affect profitability over days or weeks—positively or negatively.

How to Include Swap in Your Strategy?

• In long-term trades, consider choosing currency pairs with positive swap.
• Always check the swap rate before opening a position.
• In some strategies, positive swaps can act as a secondary income source.

Conclusion

Swap is a crucial concept in forex trading that should not be ignored. Whether it’s a gain or a cost, overnight interest can directly influence your trading account. Understanding swap, how it’s calculated, and its impact on your trading plan brings you one step closer to becoming a professional trader.

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