A forex swap fee, also known as rollover or overnight interest, is the cost or reward associated with holding a forex position overnight. It reflects the interest rate differential between the two currencies in a currency pair being traded. When you hold a forex position past 5 pm Eastern Standard Time (EST), which marks the end of the trading day, brokers automatically roll over your position to the next settlement date. Depending on the interest rate differential between the currencies you are trading, you may either receive a credit or incur a debit to your trading account. This swap fee aims to compensate for the opportunity cost of holding one currency while borrowing another, reflecting the prevailing market interest rates. For traders, understanding and factoring in these swap fees is crucial, especially for longer-term positions where cumulative swap charges can impact overall profitability.
Positive Swap
In forex trading, a positive swap, also known as a positive rollover or overnight interest, occurs when you earn interest on a currency pair position held overnight. This interest is based on the interest rate differential between the two currencies of the pair you are trading.
Interest Rate Differential: Each currency in a forex pair has an associated interest rate set by its central bank or monetary authority. When you hold a position past the daily rollover time (typically 5 pm Eastern Standard Time), if the currency you are long (bought) has a higher interest rate than the currency you are short (sold), you earn a positive swap rate.
Example: If you are long on a currency pair where the base currency (the one you bought) has a higher interest rate than the quote currency (the one you sold), you would earn a positive swap. This can be seen in pairs like AUD/JPY, where historically the Australian dollar often has had higher interest rates compared to the Japanese yen.
Negative Swap
In forex trading, a negative swap, also referred to as a negative rollover or overnight interest, occurs when you incur a cost for holding a position overnight in a currency pair. This cost is based on the interest rate differential between the two currencies of the pair you are trading.
Interest Rate Differential: Each currency in a forex pair has an associated interest rate set by its respective central bank or monetary authority. When you hold a position past the daily rollover time (typically 5 pm Eastern Standard Time), if the currency you are short (sold) has a higher interest rate than the currency you are long (bought), you will incur a negative swap rate.
Example: If you are short on a currency pair where the base currency (the one you sold) has a higher interest rate than the quote currency (the one you bought), you would incur a negative swap. This can be observed in pairs like USD/TRY, where historically the Turkish lira has had higher interest rates compared to the US dollar.
Forex Swap Calculation
Calculation Formula: The swap points are typically quoted as pips, and the actual swap amount in your account currency depends on the position size and the number of days the position has been held overnight. The swap rate is calculated as:
Swap Rate = (Exchange rate x Contract Size × Swap percentage × Number of Nights) / 360
Contract Size: This refers to the size of the contract you are trading. For standard lots, 1 lot equals 100,000 units of the base currency.
Swap Percentage: This is the difference in interest rates between the two currencies, expressed in percentage
Number of Nights: The number of calendar days the position has been held overnight.
Example Calculation: Suppose you are trading 1 standard lot (100,000 units) of EUR/USD and the swap rate for long positions (buying EUR/USD) is -3.4782%. If you hold the position overnight and the current rate of EUR/USD is 1.08925:
This means you would pay 10.52 USD in swap interest for holding a long position of 1 standard lot in EUR/USD overnight.
It’s important to note that swap rates can vary between brokers due to differences in their liquidity providers, markups, and other factors. Always check with your broker for their specific swap rate calculations. Understanding how to calculate forex swap rates helps traders manage their positions effectively, especially for trades held overnight or over weekends when swap rates typically accrue.
