Swap

What is Swap in forex and CFD trading

Swap refers to the Overnight financing cost or credit applied to a forex or CFD position that is held past the daily market closing time, typically 5:00 PM New York time. This charge or payment is a reflection of the interest rate differential between the two currencies in a pair, or the cost of borrowing/lending the underlying asset for CFDs. Swap matters for real trading decisions because it dictates the recurring holding cost for swing and position traders, directly influencing net profitability or providing positive carry income. A trader can verify or measure the Swap rate on their platform by inspecting the Swap Long and Swap Short values in the instrument specifications, usually quoted in pips or a monetary unit, which you can learn more about in our forex glossary.

Key facts about Swap

• Alternative Names: Also known as Rollover or Overnight Financing.
• Timing: Swap is applied once per day, usually at 22:00 GMT, to all open positions.
• Basis: For Forex pairs, Swap is calculated using the interest rate differential of the two currency central banks, plus a broker markup.
• Positive vs. Negative: A positive swap generates income for the trader; a negative swap incurs a cost.
• Triple Rollover: On Wednesdays, three days’ worth of Swap is applied (Wednesday, Saturday, and Sunday) to adjust for the weekend, when markets are closed but the underlying interest rate differential accrues.
• Measurement: Swap is typically quoted in pips or a percentage of the annualised interest rate, then converted to the trader’s account currency.

How Swap works in forex and CFD trading

The function of Swap is to adjust for the interest incurred on the two sides of a leveraged forex trade, where one currency is theoretically borrowed and the other is theoretically lent.

The process involves these sequential steps:

1. Market Cut-Off: At the end-of-day rollover time, the broker identifies all positions still open.
2. Interest Differential Calculation: For a currency pair, the Base Currency interest rate is compared to the Quote Currency interest rate.
3. Broker Markup Application: A small administrative fee or spread (markup) is added to the interest differential by the broker or liquidity provider (LP).
4. Swap Value Determination: The daily Swap value is set: If the interest paid on the borrowed currency is less than the interest earned on the lent currency (including markup), the Swap is positive; otherwise, it is negative.
5. Posting to Account: The resulting debit (cost) or credit (income) is automatically posted to the trader’s account equity, affecting the Floating Profit/Loss line.

The basic calculation for the Swap amount (S) in USD for a position in EUR/USD is: S = Contract Size × Swap Rate × (1 / Exchange Rate_USD) × (Days / 360)

Where: Contract Size is the volume in units, Swap Rate is the interest rate applied to the quote currency, and Days is 1 (or 3 on Wednesday).

Example of Swap with a real trade

This example shows the impact of a negative Swap on a long-term position.

• Instrument: EUR/USD (Short position)
• Position size: 1 standard lot (100,000 units)
• Account Currency: USD

Assumptions (For illustration): Swap Short Rate: -0.8 pips per day (Negative Swap) Triple Swap Day: Wednesday

Calculation of Daily Cost: Monetary Value per Pip for 1 lot EUR/USD: $10.00 Daily Swap Cost = -0.8 pips × $10.00/pip = -$8.00

Calculation of Weekly Cost (5 trading days, includes Wednesday triple): Days charged: 1 (Mon) + 1 (Tue) + 3 (Wed) + 1 (Thu) + 1 (Fri) = 7 days Total Weekly Swap Cost = 7 days × -$8.00/day = -$56.00

Result: Holding the 1-lot Short position for one full week costs the trader $56.00 in Swap charges, irrespective of price movement. With Afterprime’s zero commission structure, traders managing overnight positions only face swap costs without additional per-trade commission fees compounding their holding costs.

How Swap affects your cost and risk

Swap directly impacts the overall holding cost of a position, shifting the profitability threshold for strategies with longer holding periods. It converts the interest rate differential into a tangible cost or profit component.

Swap compared with related concepts

Swap vs Commission

Swap is an interest-based, recurring time cost applied to positions held overnight, relating to the financing of the underlying asset, whereas Commission is a one-time, volume-based fee charged for the execution of the trade order itself.

Swap vs Spread

Swap is a financial charge or credit reflecting interest rate differences, applied at rollover, whereas Spread is the difference between the Bid and Ask prices, representing the initial transaction cost applied at entry and exit.

Broker differences in Swap across the industry

The main differences in Swap offered by brokers stem from their order execution model and whether they choose to offer Swap-Free options.

How to verify Swap on your trading platform

To mechanically verify the Swap rates on MetaTrader, follow these steps:

1. Open MetaTrader and Market Watch: Open the MetaTrader platform (MT4 or MT5) and locate the Market Watch window.
2. Right-click and Select Specification: Right-click on the desired forex pair, such as EUR/USD, and select “Specification” or “Symbol.”
3. Locate Swap Information: In the specification window, look for the Swap section which displays trading costs.
4. Check Swap Long: Check the field labeled Swap Long (or Swap buy), which indicates the daily rate for a Buy position, measured in points or pips.
5. Check Swap Short: Check the field labeled Swap Short (or Swap sell), which indicates the daily rate for a Sell position, measured in points or pips.
6. Verify Swap Calculation Method: Note the swap type (points, base currency, margin currency, etc.) to understand how the swap will be calculated.
7. Sanity check: If the Swap Long value is a small negative number and the Swap Short value is a small positive number, the difference in the underlying interest rates favors holding a Short position.