Yesterday, I just found out that my friend lost money because he didn't understand swaps. He held an EUR/USD order for only 3 days, making a profit of $30 from the price movement, but after subtracting the swap, nearly $26 was gone, leaving only $4. This is something I want to share with those who still don't understand.

Swap is a fee for holding an overnight position. Its full name is "Overnight Interest" or "Rollover Fee." Simply put, it’s the interest that accrues when you hold a trading position overnight. Why does it exist? Because when you trade currency pairs, like EUR/USD, you are "borrowing" one currency to "buy" another.

Every currency in the world has its own policy interest rate. The Euro has a 4% annual rate, and the US dollar has a 5% annual rate. When you open a Buy EUR/USD position, you earn interest from the euro but pay interest on the dollar. The difference is -1% per year, meaning you have to pay a negative swap.

However, in reality, swaps do not exactly match the interest rate differential in theory. Brokers act as intermediaries and add their own "management fee." Even if the interest rate differential is positive, brokers might add enough fees to turn both sides into negative swaps.

Swaps come in many types: a positive swap means you earn money, a negative swap means you pay. There are also Swap Long and Swap Short, which are always different. A critical point to watch out for is the 3-Day Swap. On Wednesday evening, you will be charged a triple swap because the Forex market is closed on Saturday and Sunday, but interest continues to accrue. Brokers must aggregate and calculate this on trading days.

The calculation of swaps depends on how the broker displays the units. If in points, in MetaTrader, use (Swap Rate in Points) multiplied by (value of 1 Point). If in percentage, use (total position value) multiplied by (Swap Rate %). For example, buying 1 lot of EUR/USD at 1.0900, with a swap rate of -0.008% per night, the total value is 100,000 x 1.0900 = $109,000. Multiply by 0.008% to get approximately -$8.72 per night.

The key point I want to emphasize is that swaps are calculated based on the full position value, not the margin you put up. If you use 1:100 leverage and put up only $1,090 margin but pay $8.72 swap per night, that’s 0.8% of your margin per night. This is a significant risk when trading with high leverage.

But swaps are not only about risk; they also create opportunities for certain traders. Carry Trade is a strategy that exploits positive swaps by "borrowing" low-interest currencies, like Japanese yen, to "buy" high-interest currencies, like Australian dollars. If the Swap Long is positive, you earn money every night. The risk is that exchange rates might plummet, causing losses from currency fluctuations that outweigh the swap gains.

Another option is a Swap-Free or Islamic account, which does not charge swaps regardless of how long you hold the order. This is suitable for Swing Traders or Position Traders who want to hold positions for weeks or months. Of course, brokers must earn income elsewhere, such as through wider spreads.

Once you understand swaps, you can plan your trading more carefully. Sometimes, choosing a transparent broker that clearly displays this information is crucial to avoid hidden costs surprising you later.