What Is a Forex Swap and How Does It Work?

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Foreign exchange or Forex swaps are powerful tools that traders should take in account for better currency management. It’s basically a swapping agreement that involves two parties where one party lends currency to the second party as at the same time it borrows another currency from that party. In simple words, two different parties involved in FX Swap borrow and lend two different currencies in an equal quantity over a certain period of time.

FX Swap - What Is a Forex Swap and How Does It Work?

FX Swap is considered to be a useful technique to achieve risk-free lending. That’s because the amounts that the involved parties swap are utilized as collateral for payment. If you’re wondering what FX swap is in Forex and how it works, then continue reading this article as it contains everything you need to know as a Forex trader.

What is an FX Swap?

FX swap or foreign exchange swap, in simple words, is an agreement between parties. It involves lending one currency and borrowing another simultaneously at an initial date. Finally, both of the parties swap the amount that includes interest as well as principal payments of the involved currencies at maturity. A Forex swap is an interest or amount of money that your brokerage pays or charges if you hold a certain position overnight. The amount the broker pays or charges depends upon the interest rate differential of the involved currencies in your trade.

FX Swap Example

In order to understand the concept of FX swap better, let’s take a real-life example.

Let's support, party X is based in Canada and needs Euro (EUR), and the second party Y is from Europe and needs Canadian Dollar (CAD). Both the parties undergo an FX swap where the maturity period is three months. The exchange rate that the swap includes is 1.5 EUR/CAD with the total amount of 15,000 CAD or 10,000 EUR. The parties are expecting that the CAD will depreciate as compared to EUR. So, the forward rate is finalized as 1.8 EUR/CAD. The party X borrows 10,000 EUR and lends 15,000 CAD simultaneously to the party Y.

After three months, party X receives 18,000 CAD and returns 10,000 EUR to party Y according to the following formula.

10,000 EUR x 1.8 EUR/CAD = 18,000 CAD

What Determines the Swap Size?

The most important factor that determines the swap size is the interest rates that central banks issue against their respective currency. It’s safe to say that the currency that is sold in the pair is loaned while the bought one is deposited. The bigger the currency pair rate’s difference, the bigger the size of the Forex exchange swap.

It’s also important to note that other than the interest rates issued by the central banks, there are some other factors as well that determine the swap size. The most common ones are the Wednesday Forex swap trades and swap commissions charged by the brokerages.

Why Do Brokers Have Different FX Swaps?

Because of the changing currency rates, the swap rates also change constantly. Another important factor to bear in mind is that different brokers have different FX swaps, even if you examine the same FX swap rate at the same moment. That's because some of them set an additional interest rate to the interbank swap. Moreover, the criteria of each broker to calculate the swap rate can also be different, and it can be based on interest rate percentage, margin currency, currency, or pips.

What Is a Triple Swap?

Triple swap occurs when a trader holds his/her trade overnight on Wednesday. Many novice traders imagine that their brokerage is showing fishy behavior by charging unusual swap rates. But the fact of the matter is that it has nothing to do with the broker.

Every trader will need to pay triple swap rates if s/he holds a trade overnight on Wednesday. Because the trades take a couple of days to complete, and Saturday and Sundays are non-business days for foreign exchange. But the interest is still charged by the banks for the weekend, tripling the swap rates. In order to avoid it, you should avoid holding your trade overnight on Wednesday.

Where to Find the Broker's Swap Size? AvaTrade

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Finding AvaTrade’s swap size is very simple. You can follow the steps mentioned below to achieve it.

Go to the official AvaTrade website and click on the “Trading Info” as the below image shows.

AvaTrade broker - Trading Info

AvaTrade broker - Trading Info

Now click on the "Trading Calculator," which is the first option in the second row, as shown below.

AvaTrade broker - Trading Calculator

AvaTrade broker - Trading Calculator

Now the system will take you to another page where you’ll be able to see a trading position calculator, which also works as an FX swap calculator.

AvaTrade broker - FX swap calculator

AvaTrade broker - FX swap calculator

You’ll need to fill all the required fields such as your desired instrument, your account’s base currency, platform, etcetera. Once you have entered all the information, you’ll need to click on the “Calculate” button.

The system will show you all the important information regarding your next position, including swap days, sell swap cost, and buy swap cost.

How Your Profit Depends on Swap?

More often than not, the very first thing that traders consider when it comes to fees is spread. But for long-term and medium-term trading, swap is one of the most important factors that every trader must consider. If you don’t hold any position overnight, then you won’t earn or pay any swap. But on the other hand, if you hold your position in the long term or even midterm, then you'll earn or pay swap.

Example

Let's suppose your average trade at least lasts for two weeks, and your broker offers an average spread of 0.2 pips against the EUR/USD currency pair and the round-turn commission of 7 US dollars or (0.7 pips). So, the total charge will be 0.9 pips. Moreover, the swap for EUR/USD is 0.6 pips for each day according to the brokers' policy.

If you open 1 standard lot of the discussed currency pair, then the total spread will be 9 US dollars. As we have established that your trade is going to last for two weeks, so there will be a 14-day swap. It means that in total, you'll be paying 140 US dollars in terms of swap against 1 standard lot.

This example illustrates that even if your commission and spread in total are more than your swap, but you only need to pay them once. On the other hand, you'll need to make swap payments on a daily basis as long as you hold the position. That’s why it’s a critical factor to consider if you want to be involved in long-term and medium-term trading strategies.

What Is a Positive Swap?

Depending upon the exchange rate difference of currencies, the swap can be negative or positive. In simple words, if you keep your position open, then on each transfer, the amount that's deposited in your account is a positive swap.

Positive Swap Strategy Example

As mentioned, if you hold a position for more than a day, then you'll receive and pay the interest on buying and selling the currencies, respectively. If the interest that you receive on buying the currency is bigger than the interest that you pay in selling the currency, then you'll earn a positive swap.

It’s important to wait for the right opportunity to earn a positive interest rate that will allow you to keep your trade from the swap charges. Almost all the brokers offer information on their swaps and interest rates associated with different currency pairs. It’s critical to study and understand them before making your final decisions in order to trade in the positive interest direction.

Example of a positive swap

Let’s imagine that you want to buy dollars and sell euros. So, the currency pair will be EUR/USD, and if you hold this position for more than a day, then you'll receive interest and pay interest on buying dollars and selling euros, respectively. In this scenario, the euro has a lower interest rate as compared to the dollar, which means you most probably will experience a positive swap.

What Is a Swap Free Account?

Brokers usually offer swap-free account services for the users who avoid swaps because of their religious obligations or the beginners who don’t really understand the influence of foreign exchange swaps. In the Forex world, the term “swap-free account” is most commonly used for Islamic Forex trading accounts. It pretty much offers the same functionalities and features, but it doesn't include interests in any form.

Islamic Forex Trading Specific

According to Islamic laws, receiving as well as paying interest in any form is strictly prohibited. Because of the huge volume of Muslim Forex traders, most of the renowned Forex trading platforms offer swap-free accounts.

It’s important to note that no online brokerage asks its users to verify their religion which means that anyone who wants can easily open a swap-free Islamic account. But at the same time, most of the Islamic accounts offer lower leverage, and the minimum investment amount is also higher as compared to the standard accounts.

Swap-Free Account Example: Admiral Markets

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Admiral Markets is one of the most popular and successful online Forex trading platforms that offers one of the best swap-free accounts. Here are the terms and conditions of Admiral Markets’ swap-free account.

Admiral Markets Islamic Account Benefits

Admiral Markets Islamic Account Benefits

  • It’s specially designed for traders who want to perform Forex trading without paying or receiving interest.

  • It’s important to keep in mind that it’s a swap-free, not Islamic account. It means that the platform doesn’t guarantee that it’ll comply with your beliefs or faith.

  • The platform ensures that there will be no interest that the account holder will need to pay or receive. But the policies regarding the commissions and standard spreads of the brokerage will be applied.

  • The broker can update its swap-free account policies from time to time regarding certain charges that may also be applied without any prior notification.

  • The account must be used in good faith, and in case of any abuse or otherwise; the brokerage has the full authority to revoke the swap-free status without any explanation..

Broker’s Swap Comparison Tools

Because of the abundance of online Forex brokers available, choosing the right option can be very challenging. It becomes even more difficult if you have to take swap rates into account as well. That’s where the online swap comparison tools come into play. These tools allow you to find the Forex broker with the swap rates that you can easily afford.

Example of the swap comparison tools

For example, you can use the swap comparison tool offered by MyFXBook. You can use this tool to search online Forex brokerages with swap rates lower or higher than your specified amount, as the below image shows.

MyFXBook - Swap Comparison Tools

MyFXBook - Swap Comparison Tools

Other than that, this tool also offers a long list of brokers with their specified swap rates.

FX Swap Calculator

Most renowned Forex brokers offer an FX swap calculator that you can use to find the differential of currency pair’s interest rates.

Example of FX Swap Calculator

If you're using XM, then you can use its FX swap calculator to find swap values. Let’s take an example to understand how the XM FX swap calculator works.

XM FX Swap Calculator

XM FX Swap Calculator

You’ll need to determine the following:

  • 1

    Base currency = EUR

  • 2

    One point = 0.00001

  • 3

    Focused currency pair = EUR/USD

  • 4

    3 Standard Lots volume = 300,000 units

  • 5

    Exchange rate = 1.0045

  • 6

    Swap rate = 0.15

The formula to calculate the swap value is:

Swap value = (swap rate) x (trade size) x (one point/exchange rate)

Swap Value = (0.15) x (300,000) x (0.00001/1.0045)

Swap Value = 0.44 EUR

As the swap value is positive so the account will be credited.

Best Forex Brokers

In order to make the process of selecting the broker easy, we have compiled a list of the best three online forex brokerages for you. These are the best options available in the market when it comes to swapping rates and overall Forex trading experience.

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77.74% of retail investor accounts lose money when trading CFDs with this provider.

XM is a great online platform that offers a great Forex trading experience. It’s a fully regulated, low-risk, and trusted online brokerage that was founded back in 2009. It offers 11 different base currencies that you can choose for your account, and it also offers a swap-free account.

Symbol

Short Swap

Long Swap

EUR/USD

-0.114 -0.554

GBP/USD

-0.404 -0.374

USD/JPY

-0.359 -0.231
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FxPro is a fully regulated and highly trusted only Forex broker that was founded back in 2006. It offers an easy-to-understand and fast online trading platform that all types of brokers can easily use. Moreover, it offers 8 different base currencies and also allows you to open a swap-free account.

Symbol

Short Swap

Long Swap

EUR/USD

-0.0701 -0.5275

GBP/USD

-0.3769 -0.3613

USD/JPY

-0.3281 -0.1986
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Your capital is at risk.
Up to 75.93% of the broker’s non-professional clients incur losses when trading CFDs.

IC Market is a low-fee and low-risk online brokerage that can be your best choice for Forex trading. It was founded in 2007 and is currently authorized by multiple renowned regulatory authorities. It offers 10 different base account currencies and also offers swap-free accounts.

Symbol

Short Swap

Long Swap

EUR/USD

-0.042 -0.525

GBP/USD

-0.292 -0.353

USD/JPY

-0.384 -0.165

Summary

The goal of a currency swap is to get loans at suitable interest rates in the Forex market by bringing two parties together. We hope this guide will help you to deeply understand what Forex swaps are and how they work. One of the most critical steps to be successful in Forex trading is to choose the right Forex broker. The options that we have mentioned in this article offer the best swap rates, and all of them also offer swap-free Islamic accounts as well. So, you can choose the broker that suits your Forex trading needs the best, and you can create the account according to your religious beliefs. Keep this information in mind while dealing with the Forex swaps because it can help you to maximize your profits.

FAQ

What does swap loss mean in Forex trading?

If the interest rate against the purchased currency is lower than the sold currency’s interest rate, then you’ll face swap loss if you have held the position for more than a day.

Can you earn profit by using Forex swaps?

By using swaps, you can save your money, and in addition, you can also earn a bonus as well. In the Forex market, there are primarily two different types of currencies which are low-yielding currencies and high-yielding currencies. As the name implies, the low-yielding currencies come with low interest rates, and there are higher interest rates on high-yielding currencies. The currencies which are most commonly traded in the Forex market can generate a high yield.

Can you avoid FX swaps in Forex trading?

Yes, there are multiple ways to avoid foreign exchange swaps while Forex trading, which is as follows:

  • Open an Islamic account that comes with swap-free policies

  • Close all your open positions before the day ends

  • Trade in the positive interest direction

How to view swap rates?

If you find it daunting to calculate swap rates, then there's nothing to worry about. That's because most of the online Forex brokerages offer FX swap calculators or Forex swap lists that you can use to view or get the swap rates instantly.

Team that worked on the article

Chinmay Soni
Contributor

Chinmay is a certified Investment Analyst and Portfolio Manager by the National Stock Exchange (NSE) Academy. He is currently associated with a $75 million VC fund and assists them in identifying and researching investable sectors and start-ups. He has completed his Bachelors of Business Administration from the Institute of Management, Nirma University and is currently pursuing MBA majoring in Finance from the same. He has 4 years of hands-on investment experience in a variety of asset classes and his professional qualifications include being a CFA Level 2 candidate and NSE Certified Market Professional Level 2.

He finds writing as a way to express his thoughts and share his knowledge with people eager to learn. He himself happens to be an avid reader of personal finance books and on top of his recommendation list are the international bestsellers ‘The Psychology of Money’ and ‘Think and Grow Rich’

He has this one strong belief as his motto: Life is what you make of it.

Bruce Powers
Contributor

Bruce Powers is an expert trader and technical analyst with over 20 years of experience in Forex, commodities, ETFs, cryptocurrencies and other assets. He is an active trader, technical and fundamental analyst, media commentator, educator and a writer. As an author for Traders Union, he contributes his deep analytical skills, expertise and understanding of the global economy and financial markets to provide market analysis and insights. Powers is also a frequent guest on business TV news shows.

Mirjan Hipolito
Cryptocurrency and stock expert

Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO). Mirjan is a cryptocurrency and stock trader. This deep understanding of the finance sector allows her to create informative and engaging content that helps readers easily navigate the complexities of the crypto world.