Swap is the interest earned or paid when you hold a forex position overnight. Traders are credited or debited based on the interest rate difference between the two currencies in the pair.
How Swap Works
Each currency has an interest rate set by its central bank. When you hold a position, you earn interest on the currency you're long and pay interest on the currency you're short. The net difference—calculated daily—is added to or deducted from your account. Swap amounts depend on the currency pair, position size, current interest rates, and your broker's policies.
Positive vs. Negative Swaps
A positive swap credits your account overnight—you earn money for holding the position. A negative swap charges you. Direction matters: holding a high-interest currency long and a low-interest currency short typically generates positive swaps. The reverse creates negative swaps.
Carry Trading and Practical Implications
Traders use swap differences strategically through carry trading, holding positions specifically to profit from interest differentials. This works well for long-term trades where daily credits accumulate. However, swaps can change sharply if central banks alter rates, and negative swaps on multi-week positions can significantly reduce profits.
| Concept | Swap | Spread | Commission |
|---|---|---|---|
| Definition | Interest earned or paid on overnight positions | Difference between bid and ask price | Fee charged per trade |
| Impact | Affects long-term positions | Affects every trade | Affects every trade |
| Variability | Changes with interest rates | Depends on market liquidity | Fixed or percentage-based |
