What Are Swaps in Forex Trading and How to Get Around Them?

Financial markets involve millions around the world who engage in daily trading activities using a variety of strategies, including short-term and long-term plans according to different skills, experiences and expectations.

These investors implement different trading strategies to pursue financial gains, especially in the Forex market, the largest market to exist, with trillions of dollars being traded daily.

Those who use long-term strategies are often met with the swap concept, rollover fees or overnight carryover charges, which refers to holding a trading position active until the next trading day.

This term can be easily overlooked as traders may not be aware of such charges or find difficulties calculating these fees. However, we simplify it for you and show you how you can easily calculate it.

Understanding Swaps in The Forex Market

Rollovers or swaps refer to the charges the broker charges you to keep a trading position active until the next day. Most traders engage in one-day trading activities where they finalise their trading sessions before the end of the day to avoid excessive expenses. 

However, traders who prefer position trading strategies by keeping their market order for many days, weeks or months are charged with these fees. These fees are incurred according to the broker’s pricing policies and external factors. 

External factors that affect swaps include interest rates, exchange rates and economic conditions of each currency in the traded pair. Brokerage companies may have their own swap policy and may charge fixed or commission-based managerial costs for holding the account.

Rollover charges can be earned or paid, depending on how profitable the market order is, and a simple calculation helps the traders understand if the swap position is worth it.

What Types of Swaps Are There?

There are two types of swap charges depending on the market order, whether it is a long or short position.

• Short swap fees: account rollover charges of holding a short (sell) order in a bearish market until the next day.
• Long swap fees: account rollover charges of holding a long (buy) order in a bullish market until the next day.

Note that these charges are paid or received depending on the interest rate differential between the currencies involved.

Two Ways of Swap Fees

Your broker may charge you with swaps in two different ways using interest rate differentials.

• Fixed for fixed rates: Swap fees charged between a fixed interest rate payment against another fixed interest rate payment.
• Fixed for variable rates: Swap fees charged between a fixed interest rate payment against a variable (floating) interest rate payment.

Interest rate payments depend on the national economic situation of each currency of the traded pair. Rollover charges are usually incurred during the working week from Monday to Friday at 17:00 EST.

Since swaps are not charged on Saturdays and Sundays, some brokers double or triple the swap fees during the weekdays to compensate for losses on the weekend.

Calculating Forex Swap Fees

Accurately calculating the swap charges is important because you are leaving a trading position open until the next day, and you do not want to wake up and see your balance going in the negative. 

Therefore, traders analyse their rollover beforehand to estimate if it is worth holding the account overnight. You can calculate swaps using the following formula.

Swap = (contract volume × price × interest rate differential) / days

Contract volume refers to how many currencies are involved in the open position, which is expressed in units or lots. The price is the currency pair market price when the order was placed.

The interest rate differential refers to the interest payment associated with each currency of the pair based on national economic factors. The number of days used is usually 365 or 360, depending on the market and broker’s regulations. 

This formula will generate a positive or negative number, which means that leaving a market order open is a good or bad idea. Having a positive swap rate means that it is worth it, and you will receive rollover payment because your position is profitable.

However, if your calculations result in a negative number, then you are going to pay extra fees for every day the position gets carried overnight.

This formula considers external factors while the broker’s account holding fees are separately charged. Therefore, it is always recommended to be fully aware of the broker’s pricing policy regarding swaps.

Conclusion

Swaps in the Forex market are crucial to understand because the market has various opportunities to make money, and holding a market position overnight is one of them.

Understanding the factors affecting the swap rate is important. Therefore, you must carefully analyse the currency pairs you are trading and find out if you are going to pay excessive fees or receive rollover fees and maximise your gains.