What is a swap and how is it calculated
A rollover forex swap, or FX swap, is a cost (or income) to traders for holding a position overnight.
For intraday traders who are not used to holding their positions overnight, the swap is not that important.
However, if the trade is drawn out and the trader does not manage to close it before midnight, he may be surprised by a slight decrease in profit (or increase in loss), or at best a slight unexpected profit.
The size of a swap is based on the interest rates of central banks of the countries whose currencies we trade.
The larger the difference in rates, the larger the swap.
A swap is positive when a long position is held in the currency with the higher interest rate, while it is negative when the trader is in a short position on the currency with the higher interest rate.
Thus, a swap differs for different currency pairs. Its size also depends on the broker (liquidity providers).
In the specifications of the individual pairs and instruments that can be traded, a swap is stated in points per lot.
Nowadays, interest rates are often similar in most developed economies, resulting in swaps being negative in both directions.
The size of a swap in this case is influenced by the broker or liquidity provider itself.
3-day swap
A swap is charged to the trader at the end of the trading day, usually around midnight.
An interesting feature that traders need to watch out for is the triple swap being charged overnight from Wednesday to Thursday.
This is due to the fact that most instruments need two days to settle a trade. A trade that a trader opened on Wednesday will be settled on Friday and will include the weekend.
The figure above shows that when holding a trade overnight, a trader in a long position on the EURUSD pair (buying EUR, selling USD) will be deducted 6.25 points per lot, and 3.00 points per lot in a short position (selling EUR, buying USD).
If he holds a trade from Wednesday to Thursday, there will be a reduction of 18.75 points in a long position and 9 points in a short position.