Forex Swap Calculation: Navigating Yearly Overnight Costs

Have you ever left a position open in the forex market overnight? When you check your account the next day, you may notice a slight change in your account balance. This is a result of a forex swap.

New traders often overlook these fees, but over a year, they can add up to a significant amount. If you want to avoid losing your hard-earned money, you should learn how overnight forex swap fees work.

Rollover Basics

Currency is continually being exchanged in the forex market. Each country determines the interest for its currency. A forex trade, therefore, involves two interest rates.

Reason for Swaps

A forex swap is the interest you pay or receive for leaving a trading position open after the trading day has closed. The trading day ends at 5:00 PM EST. After this time, banks move all open trades to the following business day. The rollover cost Forex is therefore a cost or profit depending on the direction of your trade.

Function of Central Banks

Consider renting assets. For example, when you need to borrow money to buy Euros, and you borrow US Dollars. The Central Bank that deals with US Dollars will charge you interest for the money you borrowed. Another Central Bank that deals with Euros pays interest on the Euros you hold. Your broker will take the difference of the rates to do a daily adjustment to your account.

Overview of Swap Calculation

Do you want to know how is swap calculated when you keep a trade open and how to quantify it? The answer lies in the interest rates of the two countries plus the size of the trade and the markup, which is specific to the broker.

Swap Calculation

Most of the time, brokers will indicate the swap with a value of either points or pips. In order to convert the swap to your local currency, you need a special formula. This swap formula is the volume of the trade, multiplied by the swap in points, multiplied by the value of a point.

Basic Swap Equation

Swap Value = Trade Size x Swap Rate x Point Value

Let’s Break This Down

Example: You trade one 100,000-unit standard lot of EUR/USD. Your broker has a negative 5-point long trade swap rate. A point for that trade size, for this example, is worth 1 USD. A simple forex swap calculation shows that you will pay a 5 USD fee for that trade for that night.

Costs You Don’t See

For a single trade that loses 5 USD, you probably won’t feel the impact on your account. Just remember that those fees are incurred every night.

Using Our Example of 5 USD – Fees for Trading Open All Year

A normal trading year has roughly 260 trading days. At 5 USD every day, that comes out to a whopping 1,300 USD for a single trade, and that is before the weekend charges. If you started the year with 10,000, that overnight fee would already have cost you 13% of your account.

Wednesday Triple Swap

Be conscious of how swaps add to your position on Wednesdays. Foreign exchange trades use a two-day settlement cycle. When you hold a position past Wednesday at 5:00 PM EST, its execution and settlement date shifts past the weekend to the following Monday.

To account for this weekend interest while commercial banks are closed on Saturdays and Sundays, brokers implement a Wednesday night triple swap. If you keep a trade past 5:00 PM on any other day of the week, the standard $5.00 swap rate applies. On Wednesdays, the cost is $15.00. Those weekend charges add up. Over a full year they push the 1,300 USD closer to 1,825 USD, or about 18% of a 10,000 account.

Turning Fees into Profits and Managing Risk

Fortunately, swaps do not always carry a cost. It is possible to benefit from a swap. If you purchase a currency with a stronger interest rate and sell a currency with a weaker interest rate, then you may earn a positive swap.

Carry Trade Strategy

To take advantage of these positive swaps, traders implement a carry trade. This involves purchasing one currency and holding the position for an extended period of time. In order for the positive interest rate swaps to add up to a sizable dollar value, the exchange rate needs to remain relatively stable.

Practical Ways to Save Money

To maximize your profits, it’s crucial to recognize these overnight collateral costs and implement cost-saving measures. Here are several actionable strategies to minimize your losses due to swap rates:

• Compare your broker’s swap rates: You can view these rates through your trading platform by locating the contract specifications of each currency pair.
• Close your trades before 5 PM EST: If you manually close your position before the daily cut-off time, you will not incur a swap.
• Trade currency pairs that have low rate differentials: If the countries of the currency pair have relatively equal interest rates, the daily fee will be quite small.
• Find accounts that do not incur a swap: Many brokers will offer specific swap-free finance accounts that will charge a fixed daily admin fee instead of a daily interest fee.

Bottom Line

Now that you understand the impact of overnight costs that can add up over a year, you should recognize that many accounts lose capital because they simply ignore these costs. Before you make your next long-term trade, remember the formulas that you learned. Use them to determine your true trade costs and make trade decisions that will better preserve your capital.