What is swapping and how does it affect traders' profits

For traders looking to increase profits, swapping is a cost often overlooked, but it can quietly eat into your gains. Therefore, understanding what swapping is, how to calculate it, and how to manage it effectively are essential skills every trader must have. This approach will help you plan your trades reasonably without being surprised later by hidden costs.

How Much Damage Can Hidden Costs Cause to Traders?

Besides spreads and commissions, swapping is another fee that is often ignored, especially by beginners. Imagine you make a profit of $30 from price differences, but if you hold the position for 3 nights, and swapping costs $26, your net profit drops to only $4. This is why many people find trading very difficult, even if they profit from each trade.

Understanding this hidden cost is crucial not only for preventing losses but also for choosing the right strategy. Short-term traders who close positions within minutes or hours may hardly be affected by swapping, but those holding positions for weeks or months need to consider this cost seriously to keep profits high.

The Principle of Swapping: The Interest Rate Differential Between Currencies

If we strip down swapping to its core, it’s not as complicated as it seems. Swapping is the fee for holding a position overnight, arising from the interest rate difference between the two currencies you are trading.

When you trade a currency pair like EUR/USD, you are essentially “borrowing” one currency to “buy” the other. If you open a long (buy) position on EUR/USD, you are “buying” EUR and “borrowing” USD. Conversely, a short (sell) position on EUR/USD means you are “borrowing” EUR and holding USD.

Each currency has its own interest rate set by its central bank, such as the Federal Reserve for USD or the ECB for EUR. When you “borrow” a currency, you pay interest; when you “hold” a currency, you earn interest. The difference between these two rates is what we call swapping.

For example, if the Euro (EUR) interest rate is 4.0% annually and the US dollar (USD) interest rate is 5.0% annually, and you buy EUR/USD (buy EUR, borrow USD), you earn EUR interest (4.0%) but pay USD interest (5.0%), resulting in a net of -1.0% per year—meaning you pay negative swapping. Conversely, if you sell EUR/USD (borrow EUR, hold USD), you pay EUR interest but earn USD interest, resulting in a positive swap of +1.0% annually.

In reality, brokers act as intermediaries in this borrowing process. They add their own management fees into the actual swap rate, so even if you are supposed to receive a positive swap, the broker might deduct their fee, leaving you with less or even a negative swap. This is why swap rates for long (buy) and short (sell) positions are rarely exactly the same.

How to Read and Calculate Swapping Costs on Trading Platforms

It’s important to know the swap amount for the assets you trade before opening a position. Finding this information is straightforward but varies depending on your platform.

On standard platforms like MT4 or MT5, go to the Market Watch window, right-click on the asset (e.g., EUR/USD), and select Specification. Look for “Swap Long” and “Swap Short.” The figures are usually in points, which you need to convert into real money.

On newer broker platforms like Mitrade, the process is simpler. Select the asset you want to trade, and on the right side of the trading window, find the “Overnight Fee” or “Swap Rate” section. Mitrade displays swap rates as percentages per night, such as -0.015% or +0.008%. Clear presentation helps traders calculate costs precisely before trading.

There are two main ways to calculate actual swap costs:

1. If the broker shows swap in points (MT4/MT5):

   Swap (money) = (Swap Rate in Points) × (Value of 1 Point)

   For example, if you trade 1 lot EUR/USD with a swap long of -8.5 points, and 1 pip (10 points) equals $10 USD, then 1 point = $1 USD. The calculation: (-8.5 points) × ($1) = -8.5 USD. Holding overnight for one night costs you $8.5. For a 3-day swap (Wednesday night rollover), multiply by 3: -8.5 × 3 = -25.5 USD.

2. If the broker shows swap as a percentage per night (e.g., Mitrade):

   Swap (money) = (Total position value) × (Swap rate %)

   Total position value = (Number of lots) × (Contract size) × (Price at rollover)

   For example, buy 1 lot EUR/USD at 1.0900 with a swap rate of -0.008%:

   Total value = 1 × 100,000 × 1.0900 = 109,000 USD

   Swap per night = 109,000 × (-0.008 / 100) = -8.72 USD

   For 3 nights: -8.72 × 3 = -26.16 USD

A key point is that swapping is calculated based on the full position value, not just the margin. If you leverage 1:100 on a 1-lot position, you might only need $1,090 margin, but you pay swap on the full $109,000 position. This means the swap cost relative to your margin can be significant—about 0.8% per night—potentially eroding your margin over time, especially with high leverage and long holding periods.

Why Do We Mostly Pay Swapping?

Many traders wonder why they often pay swapping even when theoretically they should receive it. The confusion arises because, when holding a position from Wednesday to Thursday, the settlement date (T+2) falls on Monday, when the forex market is closed. This means you are effectively “borrowing” money over the weekend (Friday, Saturday, Sunday), and brokers charge interest for all three days in the Wednesday night rollover, leading to a “3-Day Swap” that many beginners overlook.

Some brokers may use different days depending on their policies and the asset class, so it’s essential to check with your broker which days the 3-day swap applies.

Swapping also extends beyond forex to other assets like CFDs on stocks and indices. The swap rate often depends on the interest rates of the underlying currencies or the cost of holding the asset, such as storage costs for commodities like gold or oil, or rollover costs for futures contracts. Cryptocurrency CFDs typically follow funding rates on exchanges, which can be highly volatile.

Carry Trade Strategy: Turning Swapping into an Opportunity

Once you understand how swapping works, you realize it’s not just a risk but also an opportunity for certain traders.

A classic strategy exploiting positive swaps is the “Carry Trade.” The idea is to “borrow” currencies with very low interest rates (like JPY or CHF) to “buy” currencies with high interest rates (like MXN or TRY). When the interest rate differential is large, the goal is to earn positive swap income daily.

For example, if you buy AUD/JPY (buy AUD, borrow JPY), and the swap rate for long positions is positive, you earn interest every night. Many traders use this strategy to generate additional income.

However, carry trades carry risks: the main one is exchange rate risk. If you buy AUD/JPY to earn swap income but the exchange rate moves against you sharply, the loss from currency movement could outweigh the accumulated swap gains. This strategy is best suited for stable markets with low volatility in exchange rates.

Another option is to use “Swap-Free” (or Islamic) accounts offered by many brokers. Due to religious prohibitions against paying or receiving interest, these accounts do not charge swap fees regardless of how long you hold positions. They are ideal for Muslim traders and for swing or position traders who want to hold positions for weeks or months without worrying about swap costs. Brokers usually compensate for the lack of swaps through wider spreads or fixed fees.

Summary: Managing Swapping According to Your Trading Style

Understanding what swapping is and how it affects your profits distinguishes successful traders from those who fail. Swapping is not just a minor fee; it’s a critical part of trading planning.

For short-term traders like scalpers or day traders, swapping has minimal impact because they close positions within minutes or hours. But for traders holding positions for weeks or months, swapping can significantly affect profitability. You might choose to trade only the side with positive swap, employ carry trade strategies, or use swap-free accounts.

Finally, selecting a transparent broker that clearly displays swap rates, like Mitrade, helps you plan your trades carefully without hidden costs surprising you later.