I just realized that many new traders don’t clearly understand what swap is and how it affects their accounts. Today, I want to share a few things I’ve learned while working with forex.

Simply put, what swap actually is is the interest you have to pay or receive when you hold a position overnight. It happens because, in forex trading, you have to borrow one currency to buy another currency, and these two currencies have different interest rates. It’s that difference that creates the swap.

There are two main cases: if the interest rate of the base currency is higher than the counter currency, you’ll earn a positive swap (that is, you receive money). Conversely, if it’s lower, you have to pay a negative swap. For example, if you buy EUR/USD and hold overnight, if the EUR interest rate is higher than the USD, you’ll receive a positive swap. But if you sell GBP/JPY, you might have to pay because the interest rate differential is in the opposite direction.

How do you calculate what swap is? It depends on three main factors: the interest rate difference between the two currencies, the size of your position, and additional fees from the broker. The larger the position, the higher the swap fee. Most brokers apply the swap at the end of each trading day, around 5 p.m. New York time.

One important thing is that on Wednesday, brokers usually triple the swap fee to account for the transfer at the end of the weekend. So if you don’t want to be hit too hard, try to close your trades before that day.

There are a few ways to reduce or avoid swap costs. If you have religious restrictions or simply want to avoid this fee, many brokers offer swap-free accounts (Islamic accounts). Alternatively, you can choose to trade currency pairs with a positive interest rate differential so you receive swap credits instead of paying. The simplest way is not to hold positions overnight—close your trades before rollover to completely eliminate this fee.

In fact, what swap is also relates to central bank policy. When central banks change interest rates, the swap rate changes accordingly. Exotic currency pairs often have higher swap rates because there’s greater volatility and larger interest rate differentials.

The benefit of a positive swap is that it can help you earn additional income, especially if you trade currency pairs with favorable interest rate differentials. But the downside is that a negative swap increases costs, particularly for long-term positions. It’s also quite complex to calculate, especially for beginners.

I recommend that you understand what swap is and how it affects you before you start trading on a large scale. Check your broker’s swap rate, compare across different exchanges because they differ, and plan your trading strategy around these costs. This will help you optimize profits and minimize the negative impact on your trading performance.