SWAP Fees – What are They and How Do They Affect Traders

Swap fees, swap charges, rollover rates, spreads… If you are new to trading, you have to deal with certain terminology that seems incomprehensible. Therefore, before you jump into the financial markets, even on a demo account, it is advisable to learn the trading basics, including studying the Forex terminology.

Swap Charge Meaning – Swap Rates Explained

A swap fee is an interest charged or received for maintaining a trading position over the end of the trading day,00:00 server time. Here we are talking about the rollover trading position.

Swap is a concept whereby you pay a swap fee once you leave your trade open overnight in the financial markets. It’s tightly related to the rollover/swap rate.

The rollover rate represents the net interest return on a trading position open overnight by a trader.
If you practice short positions trading, be it scalping or day-trading, you will never have to worry about the rollover rate or pay attention to the swap fee since your positions will only last a few seconds or minutes (a few hours sometimes).

Only traders who open long positions and practice long-term swing trading care about the swap fee.

 

What is the Forex Swap Charges?

A Forex swap fee is a rolling interest in online Forex trading that you earn or pay to hold your positions overnight.

It also stands for the exchange rate related to a fixed currency swap.

Forex swap fees depend on the underlying interest rates of the relevant currencies. It also depends on whether you go long or short on the relevant currency pair.

Therefore, there are long swap fees and short swap fees. These depend on whether you keep long or short rollover positions open overnight.

If you go short with EUR/USD overnight, you will be charged interest in borrowing euros. Also, you will receive interest for lending USD.

Going long EUR/USD overnight incurs charges for borrowing USD, and you can receive swap fee interest for lending euros.

Basically, the Forex swap rate stands for the interest rate at which one currency will be exchanged for an interest rate in another currency.

But where do brokers charge swaps?

The interbank system determines swap fees and financial institutions release them every day.

The final calculation comes down to the charges the broker incurs for the rollover position in the market. Brokers usually measure swap charges according to the size of 1.0 lot.

Regarding Forex swap rates, beware that Wednesday represents a triple swap day for currency pairs trading.

Most of the brokers update their swap rates once to twice a week.

Roughly traders consider the Swap fee to be a loss. However, it is not necessarily a loss. The swap fee is either a credit or a debit applied to the trader’s account.

How to make money from the swap in Forex trading?

Carry trade is perfect to profit from swaps since you just need to find high-yielding and low-yield pairs. Some of the high-yield (positive) currencies include the Australian dollar (AUD) and the New Zealand dollar (NZD). While low-yield (negative) currencies include the Japanese yen (JPY) or the euro (EUR).
If you buy a high-yield currency for a low-yielding account currency, you will earn positive swap interest. However, you ought to be aware that it can also go the other way around.

The swap is an added bonus for holding a long-term position (or in the case of the negative swap, a disincentive).

Forex Market Swap Calculator

To calculate the Forex swap fee, you can simply use the Forex market swap calculator available on the foreign exchange trading platforms. For example, you enter your trading instruments such as EUR/USD pair, your account currency, and trade size in units.

You can also find the broker’s latest swaps in Forex Meta Trader 4. Go to Menu, among symbols select currency pair and go to properties.

However, for a precise picture, we give you an example of Forex swap rate calculation.

Swap charges calculation Example

Suppose you are speculating on the world’s most traded major currency pair, the EUR/USD. The swap fee is calculated based on the interest rate differential between the base and quote currencies of the EUR and USD.

Imagine for a moment that your EUR/USD position is of the order of a micro-lot (0.01 lot size, i.e., € 1,000 after leverage) and that the short-term interest rates are 0 .05% on the euro and 0.25% on the US dollar. Therefore, to calculate interest, we need to know the short-term interest rates of the two currencies and the amount of currency purchased.

For example, suppose the investor has a long position of 10,000 EUR/USD (0.10 lot). And the short-term interest rates are 0.05% for the Euro and 0.25% for the US Dollar. In this case, the daily interest will be [{1.000 x (0.05% – 0.25%)} / 365] = $ -0.05479

In our example, by going long on the EUR/USD, a trader will see his trading account debited by approximately 5 cents per trading day ($ 0.05479) since, in practice, the trader is buying the euro and selling the dollar.

The trader, therefore, gains 0.05% on the EUR but loses 0.25% on the USD. It’s a difference of -0.20% over a year, corresponding to -0.05479 $ daily (when we divide this figure by 365 days).

For a positive swap fee interest, the base currency must have an interest rate higher than the quote currency.

Conclusion – Forex commission and swap charges

Navigating through the Forex market requires a solid grasp of various financial instruments and their associated costs, one of which is swap charges. Essential to any trading strategy, especially when trading forex, swap charges come into play when a trader holds a position open overnight. These fees, also known as rollover interest, are an integral part of the Forex trading process, deeply influenced by rate fluctuations in the market. Forex swaps and their charges are crucial for traders to consider, as they can significantly affect the profitability of long-term positions.