Forex swap is a small fee or credit applied to each open position overnight, typically a few pips, charged by the broker at 21:00 GMT. These points collectively form the currency swap (from English swap – exchange), which can be positive or negative based on interest rate differences.
How Forex Swap Is Formed
The forex market operates 24 hours a day, 5 days a week. However, global regulations require all open positions to be closed and settled with real money at the end of the day, at 21:00 GMT. This triggers fund movements across client accounts in banks worldwide. Traders care less about cashing out, as their main benefit comes from currency turnover, not cash.
To avoid cash settlements, forex brokers close all open trader positions and reopen them with the same volumes exactly at 21:00 GMT. This operation is called a currency swap.
How to Calculate Forex Swap
The key factor in currency exchange is the interest rate differential – the difference in central bank rates of the countries whose currencies are traded. This difference determines the swap value. Buying a currency with a higher interest rate yields a positive swap; selling it results in a negative one.
For positive interest rate differences, the formula is:
Swap = (Trade Amount × (Interest Rate Difference – Broker Commission) / 100) × Current Pair Price / Days in Year
For negative differences:
Swap = (Trade Amount × (Interest Rate Difference + Broker Commission) / 100) × Current Pair Price / Days in Year
The broker’s commission for rolling over the position to the next day is already included in the swap value.
FAQ
What is a forex swap?
A forex swap is an overnight adjustment to your account based on interest rate differences between the two currencies in a pair, charged at 21:00 GMT.
When is swap applied?
Swaps are applied daily at 21:00 GMT when brokers close and reopen positions to comply with settlement rules.
How does positive vs negative swap work?
Positive swap credits your account if you hold a higher-interest currency long; negative swap debits if short or holding lower-interest currency.
