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  Welcome to the Forex Encyclopedia Channel of WikiFX, a professional knowledge-sharing platform. Today, we'll delve into the fascinating world of “swaps” in forex trading, covering topics like the definition of “swap” in FX, how swap rates are determined, and some useful strategies for avoiding swap fees. We hope this article will help you better comprehend swaps in forex trading.

What Is A Swap in Forex Trading?

  In forex trading,the swap, also known as the overnight fee, is the interest the trader either pays or gains based on their asset when it is held during leveraged trading.

  The interest rates of the respective central banks are a major factor in the Forex swaps. When you buy one currency in a pair and sell the other, you are essentially making a deposit and borrowing money. The size of the swap depends on the size of the rate differential between the two currencies in the pair. When we buy or sell a currency pair, a swap will be credited to or debited from our account, respectively.

  A positive swap is one in which the receiving party makes a deposit into the receiving party's account upon the transfer of an open position. It occurs when a currency with a high-interest rate is exchanged for a currency with a low-interest rate.

  A negative swap is a swap that is deducted from a trader's account for every transfer of an open position. It results from exchanging a currency with a low-interest rate for one with a high-interest rate.

  When you open a position, for instance, you are actually making two trades: purchase of one currency and a sale of the other. To make a sale in one of the currencies, you must effectively borrow that amount to sell, which means you will incur interest costs. However, the currency you are purchasing will accrue interest.

  You may receive interest for holding the position overnight if the underlying interest rates for the currency you bought are higher than the currency you sold. However, other factors, such as a broker's markup, make it likely that you will be charged interest regardless of the position created.

What Determines the Forex Swap Rates?

  As was just discussed, the decisions that are made by the central banks of each country's currency determine the interest rates that are applied to that nation's currency. The amount that may be paid back to the trader or charged to them may also be contingent on the following:

  Interest rate differentials between various currencies

  In 2018, the U.S. economy grew strongly, prompting the Federal Reserve to raise interest rates four times to control inflation, significantly increasing U.S. dollar rates. Meanwhile, the European Central Bank and the Bank of Japan maintained cautious policies, causing interest rate differentials to widen between the U.S. dollar and the euro and yen. For USD/JPY, the overnight swap rate rose from about 0.02 at the end of 2017 to around 0.15 by the end of 2018. In the case of USD/EUR, the rate increased from around 0.03 at the end of 2017 to about 0.1 by the end of 2018 due to rising U.S. interest rates.

  The Commission structure employed by your forex broker

  •   Brokers with fixed commissions have no impact on overnight interest rates, which are determined by the amount of funds and specific currency pair rates.

  •   Floating commissions, based on trading volume, increase trading costs but don't affect overnight interest.

  •   Interval commissions don't influence overnight interest, but varying commission costs at different trading levels can impact strategies.

  •   With monthly commissions, brokers may adjust overnight interest calculations for income balance.

  •   Brokers using spread commissions may have differing quotes affecting overnight interest rates.

  The day you choose to open your position

  •   If you open a position in the middle of the month, you will not be eligible for overnight interest for the entire month. It is necessary to calculate the actual number of days the position is held.

  •   When opening a position on the last day of the month or a few days before month-end, please be aware of the calculation rules for overnight interest. Some brokers may settle in advance, which means you won't receive the full amount of overnight interest.

  •   Over weekends and holidays, no overnight interest is charged. Therefore, it's advisable to avoid opening positions on weekends and holidays to maximize your earnings.

  . The fluctuations in currency

  Significant fluctuations in currency exchange rates can increase the risk associated with holding positions and may lead to a reduction in a trader's position size, thereby affecting overnight interest income. Exchange rate fluctuations can also result in changes in overnight interest rates, and the variability in interest rate swaps can impact the acquisition of overnight interest.

When Are Swaps Charged?

  Your broker will determine the precise time at which the swap will be debited from your trading account. The majority of brokers charge around midnight, typically between 23:00 and 00:00 server time.

  Sometimes, the swap may be charged for keeping a position over the weekend, even when the position is not kept over the weekend. The weekend swap is charged on either Fridays or Wednesdays, depending on the market, to offset the fact that the markets are closed during the weekend.

  If you retain your position overnight on the day when weekend swaps are applied, you will be charged three times the standard swap rate.

  To determine exactly when your broker applies a swap charge to your trading account, you can either look at the contract details for the instrument you are trading or contact them directly to find out.

How are swaps calculated in forex trading?

  Calculating swaps in forex trading is not a difficult task. Here is an easy formula to follow:

  Swap = (Pip Value * Swap Rate * Number Nights)/10

  For example, trade one standard lot or 10,000 units of EUR/USD (long) with an account denominated in USD

  . Pip Value: $10

  . Swap (Long) Rate: -1.739

  . Swap fee: (10 *-1.739)/10 =-$1.739

  In fact, whether you are in a long or short position determines the calculation.

How Do Forex Swaps Work?

  Now well look at the forex swap process in detail:

  For the EUR/USD pair, Swap (short) is 0.02, and Swap (long) is -0.34. For the purpose of illustrating how swaps work, we'll take the EURUSD pair as an example:

  Suppose a trader shorts the EURUSD by one standard lot on Thursday and leaves the position open overnight, closing it on Friday. Standard Lot Size x (0.02) x (0.0001) = $0.20. That's right; he makes ten cents in interest.

  The swap long formula for the same trader who goes long on EURUSD by 1 standard lot on Thursday and doesn't close his position until Tuesday is as follows: 100,000 x (-0.34 X 0.0001 pip) = -$ 3.4 each night. This equates to an overnight interest expense of $3.8. He must pay $10.2 in interest (-3.4 * the number of nights he has his position available).

  So, let's say that the same position is open the following Thursday but closed the week before. That's a whole week, as there would be seven nights total (five during the week and two on the weekend). Therefore, he would have to fork up $ 23.8 in interest (=7 times -4.8). Any seats that remain available on Wednesday will automatically be subject to a weekend swap (lasting 2 nights). A trader who shorts EUR/USD on Monday with 1 Standard lot and closes his position on Thursday would have his position open for only 3 nights before the weekend swaps kicked in. That would make a grand total of 5 nights. With a nightly profit of $0.10 (100,000 times 0.000001), the trader would make $50 ($0.10 times 5) throughout the course of his open position.

How to Avoid Paying Swaps in Forex Trading?

  Next up, Lets discuss some useful trading strategies for you to avoid paying swap rates in forex trading:

Open a Swap-Free Account

  Investors or traders who identify as Muslim can choose to open this account type. Many people who aren't Muslims, though, will select this option if given the chance. In accordance with Islamic principles, no interest is charged on any transactions processed through these accounts. The use of a swap-free Islamic account is recommended if you anticipate a high volume of overnight transactions.

  Forex brokers are plentiful and deciding on a reliable one who provides swap-free accounts might be challenging. You can easily see if a forex broker is legit with the help of WikiFX, a global regulatory inquiry platform.

  If you're looking for a proper forex broker that also offers swap-free accounts, the following are some options to consider:

Provider Regulation Min. Deposit Trading Platform
ASIC, CYSEC US$200 CTrader, MT4, MT5
ASIC, FCA, DFSA, CYSEC US$200 MT4, MT5, cTrader, TradingView
ASIC, FCA, FSA,SFC $2,000 TraderWorkstation, IBKR Mobile, APIs

Trade Intraday Only

  Keep in mind that exchange fees accrue overnight on unclosed deals. As an added bonus, all trades must be closed by 5 pm EST each day in order to be free of swap interest.

  Traders often deal with multiple brokers in different time zones, so it's always a good idea to check in with each one individually to learn more about their 5 PM cutoffs. This is due to the fact that participants in the foreign exchange market operations in different time zones and at different hours of the day.

Trade in Positive Interest Direction

  Go ahead and make some trades in the direction of the currency pair that offers favorable swap rates. For use in both retroactive and prospective testing of your trading strategy, this provides the most promising potential course of action.


  To conclude, a swap in forex trading is the interest that you either earn or pay for a trade that you keep open overnight. To stop negative swaps or avoid paying swap rates in your forex trading, you can choose to trade in the direction of positive interest, trading intraday, or just open a swap-free trading accounts.

  For more interesting forex encyclopedia articles, WikiFX is here at your disposal.

  WikiFX is a professional, global forex broker regulatory inquiry tool with extensive and easily accessible data on Forex Brokers (more than 38,000 brokers are now enlisted), the Forex Industry, News, Educational Resources, and more. For more forex-related information and resources, please visit the WikiFX website or download WikiFX App now.

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