What Is a Forex Swap and How Does It Affect Open Positions?

Swing traders who keep their positions for two or more days should understand Forex overnight swaps, which are a specific trade cost that should be taken into account. This article discusses how your online Forex trading platform charges swap commissions and why they are needed.

Overnight exposure in Forex is never cost-neutral – it carries either a reward or a penalty that varies with global interest rate policy. Charles Schwab’s May 2025 guide on Forex financing rates makes clear that the daily rollover adjustment applied to any open position reflects the interest rate differential between the two currencies in the pair, resulting in a credit or debit that changes as central bank rates evolve.

Read on to see how these daily rollover adjustments affect your trades.

What Is a Forex Swap?

To begin with, there is a lot of confusion surrounding this term, so let’s clear it up before going any further. Here, Forex swaps have two meanings:

• Forex overnight swap in retail trading is a fee that traders pay or receive for holding positions overnight.
• Foreign exchange swaps are also financial instruments used by banks, governments, and companies to exchange interest payments denominated in one currency for interest payments denominated in another currency. We are not discussing these here, although they are related at some level.

Also, crypto investors who start their Forex journey may get confused because of token swaps, which are direct token exchanges carried out on decentralized applications. This is a different concept entirely.

So what is a Forex overnight swap? It represents the interest fee that is either charged to or paid to a trader for holding a position overnight. In other words, the position remains open past the daily settlement time, which is typically around 5:00 PM New York time.

As you know, each Forex trade is about buying one currency and selling another at the same time. The trader is effectively borrowing one currency to buy the other one in the pair. This creates an interest obligation that gets settled at the end of each day.

The swap can be positive or negative. It all depends on the direction of the trade and the interest rate policies of the central banks related to each currency in the pair.

How Do Forex Swaps Work?

Forex swaps all come down to the interest rates of the respective currencies. If the currency you buy has a higher interest rate than the one you sell, you may actually receive a small payment. If the opposite is true, you will be charged a fee. However, most retail traders encounter negative swaps more often than positive ones, making it an ongoing cost of holding positions overnight.

Let’s consider an example. You buy EUR/USD, which means you’re purchasing euros and selling U.S. dollars. Every currency has its own interest rate, so you’ll either earn interest on the currency you bought or pay interest on the currency you borrowed. The difference between those two interest rates is what we call the swap.

If the Euro’s interest rate is 3% and the USD’s rate is 5%, you’d generally pay a negative overnight swap based on that 2% annualized interest rate differential.  

In reality, Forex swap charges vary from broker to broker, because they may add their own fees as well. However, the general rule is that majors usually have smaller swaps due to slight interest rate differences, while minor and especially exotic pairs have large swaps that can make swing trading unfeasible altogether.

It’s also worth noting that there can be triple swaps on Wednesdays, which are meant to account for the weekend rollover.

How can Forex Swaps Affect Trading?

Day traders who close all positions before the end of the session don’t care about swap fees, but swing and position traders do.

If you hold a position in a high-interest-rate environment, a negative swap of just a few pips per night can erode profits steadily over a few days. If your position size is significant, those daily charges accumulate quickly.

The good news is that a well-selected carry trade in which the swap is consistently positive can add a reliable passive income stream on top of any price movement gains.

How to Control Forex Swaps?

While swaps are often regarded as commissions that erode positions, some traders choose to build entire strategies around them. The most common approach is the so-called carry trade, where you buy a high-yielding currency while selling a low-yielding one. The goal is to end up with a small rollover payment. This strategy works best in stable market conditions when exchange rates show low volatility.

Another approach is to simply avoid swaps. In this case, you should deliberately close positions before the daily cutoff and reopen them afterward to sidestep rollover charges. However, this requires precise timing and can result in additional spread costs.

Traders who follow Sharia laws may consider Islamic trading accounts, which are swap-free due to the prohibition of interest, but they should be ready for higher spreads.

In the end, Forex swaps are an unavoidable part of holding positions overnight. Therefore, it’s recommended to treat them as a built-in trade cost rather than an afterthought. That’s what separates disciplined swing traders from those who are caught off guard by shrinking margins.