What is a Swap? Forex Basics

Forex Educational Video Series

What is a Swap in Forex trading?

A swap in forex refers to the interest that you either earn or pay for a trade that you keep open overnight. There are two types of swaps: Swap long (used for keeping long positions open overnight) and Swap short (used for keeping short positions open overnight). They are expressed in pips per lot, and vary depending on the financial instrument you’re trading. In FXTM, you can see what swaps apply to which instrument on the Contract Specifications page. In the case of EURUSD, for instance, Swap short is 0.01 and Swap long is -0.48. Let’s use the EURUSD as an example to show how swaps work: if a trader shorts on EURUSD by 1 standard lot on a Thursday, and keeps the position open overnight, closing it on Friday, the Swap short is calculated as follows: 100 000 (the size of 1 Standard Lot) x (0.01 x 0.0001 pip) = $0.10. Meaning he earns $0.10 of interest. If the same trader goes long on EURUSD by 1 standard lot on Thursday, and only closes his position on the following Tuesday, the swap long formula would be: 100 000 x (-0.48 X 0.0001 pip) = -$4.8 per night. Meaning he pays $4.8 of interest per night. Since he’s keeping his position open for three nights, that would be a total interest of $14.4 (-4.8 X 3) that he would need to pay.

Now let’s say the same position is only close the following Thursday. That would be a full week, which means 7 nights (5 week nights + 2 extra added for the weekend). This means he would pay $33.6 (7 X -4.8) of interest. It’s important to remember that, as a general rule, weekend swaps (2 nights) are always applied to any positions kept open over Wednesday. If a trader were to short EURUSD on a Monday with 1 Standard lot, and close his position on Thursday, the position would theoretically be open for only 3 nights, but at midnight on Wednesday, the weekend swaps would be applied. This would raise the total number of nights to 5. In this case, the trader earns $0.10 a night (100 000 X 0.000001) so he would earn a total of $0.50 ($0.10 X 5) for the total duration of his open position.

Disclaimer: This written/visual material is comprised of personal opinions and ideas. The content should not be construed as containing any type of investment advice and/or a solicitation for any transactions. It does not imply an obligation to purchase investment services, nor does it guarantee or predict future performance. FXTM, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability for any loss arising from any investment based on the same.

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