Swap: what holding a position overnight costs (or pays) you

You opened a position on Monday, it is still open on Thursday, and your balance has moved even though you closed nothing. Looking at your history, you see a "swap" line every day. That amount, sometimes negative, sometimes positive, is the overnight financing cost of your position. If you hold trades for several days, it can become as important as the spread.

Why swap exists

When you trade a currency pair, you are economically buying one currency and selling another. Buying USD/JPY amounts to holding dollars funded by borrowing yen. Each currency has its own interest rate, largely set by its central bank. If you hold the higher-yielding currency, you collect the difference in theory. If you hold the lower-yielding one, you pay it.

In the spot market, a currency trade normally settles two business days later. A CFD trader does not want to take delivery of currency, so every evening the broker rolls the position over to the next day. That roll is called the rollover, and the interest adjustment that goes with it is the swap. It is applied once a day, usually at 5pm New York time, which is 10pm in London.

Positive swap, negative swap

The broker starts from the interest rate differential between the two currencies, then takes its own markup. That is why, on the same pair, the long swap and the short swap are almost never symmetrical. Often, both are negative.

Platforms often show swap in points or pips per lot in the contract specifications. The principle is the same: a positive figure is credited to your account, a negative one is debited. It is applied to the real size of your position, not to the margin.

Worked example on USD/JPY

For this example, we assume a 4.5% rate for the dollar, 0.5% for the yen and a broker markup of 1% a year. These rates are hypothetical: always check the real swaps in your platform, because they change with central bank decisions.

The result is in dollars, the base currency of USD/JPY. If your account is in euros or pounds, it is converted at the current rate. Over a single night, these amounts look small. Over a three-week swing trade, the short position in this example would cost more than 280 dollars in swap.

The Wednesday triple swap

The currency market does not settle trades on Saturday and Sunday. A position rolled from Wednesday to Thursday sees its settlement date move from Friday to the following Monday, so it spans the weekend. That is why, in forex, the swap applied on Wednesday night counts for three days.

Swap is not just a forex thing. On an index CFD such as the DAX or the S&P 500, you pay financing based on a benchmark rate plus a markup when long, and you often receive little or nothing when short. On a crypto CFD, financing charges can be particularly high: check them before holding a position for several days.

Islamic accounts, carry trades and good habits

To respect the ban on interest in Islamic finance, many brokers offer swap-free accounts, known as Islamic accounts. No swap is applied, but the broker often makes up for it in other ways: fixed admin fees after a certain number of nights, wider spreads or a shorter list of instruments. These accounts are in principle reserved for clients who need them for religious reasons.

Some traders do the opposite and try to collect positive swap by holding a high-yielding currency against a low-yielding one for a long time. This is the carry trade. The swap received can look steady, but one sharp drop in the pair can wipe out months of interest: it is never guaranteed income.

1. Before any multi-day trade, check the long and short swap in the contract specifications.
2. Build swap into your target: a small-target, long-horizon trade can be eaten alive by financing.
3. If you day trade, closing before 5pm New York time lets you avoid swap completely.
4. Watch out for Wednesday night in forex and Friday night on some CFDs.

Leveraged trading loses money for the majority of retail traders, and swap is one of the most often forgotten costs. In the next lesson, you will add up every cost covered in this level to find the real cost of a trade.