A swap is the interest rate difference between the 2 currencies of a trading pair you are dealing with.

In other words, A swap in forex is the interest earned or paid for a trade open at least overnight or for multiple days. Swaps are also called Rollover.

You can calculate the rollover interest (either to be earned or paid) by using the rollover rate, which means the interest rate differential between the two currencies in the traded currency pair.

For example, if you are trading in the forex pair EUR/USD, EUR is the base currency and USD is the quote currency which means you would be buying the Euros and selling the USD.

Now if the EUR has an interest rate of 3% with respect to 1% for the USD, you would be credited the interest rate difference of 2% per year (on an unleveraged trade).

But, if the USD has a higher interest rate, you would be debited from the interest rate differential.

**Formula to calculate swap interest**

*The Swap formula would look like this –*

Swap = Standard lot x (pip x swap interest rate)

Swaps are calculated in pips per lot. Swap interest rates are decided by the forex brokers that vary from broker to broker.

For example, OctaFX charges -0.64 pips on Swap short and -1.03 pips on Swap long. You can check out swap charges by OctaFX on major currencies.

Swap = Standard lot x (pip x swap interest rate)= 10,000 x (0.0001 x -0.64)

= 10,000 x (-0.000064)

= -0.64

So, -$0.64 would be the swap charges for swap short in OctaFX for one overnight position.

On the other hand, Forex.com has different swap charges rates as shown below –

Swap short and swap long are the different types of swaps that we’ll discuss in the next section. You’ll also know how to calculate the swap interest rates.

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## Types of Swaps

### #1. Swap Short

Swap short is calculated for having short positions open for at least overnight.

When the trader expects the currency is going to depreciate, he will take a “Short Position”.

In a short position, you execute a selling order first at the present market price and buy later on when the price of the currency pair decreases to make some profit.

**How to calculate swap short**

Assuming that you take a short position on EUR-USD by 1 standard lot on Thursday, and keep the position open overnight to close on Friday.

The swap formula would look like this –

Swap Short Charges = Standard lot x (pip x swap short interest rate)

= 100,000 x (0.0001 x 0.01) = $0.10

This means you have earned $0.10 interest.

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### #2. Swap Long

Swap long is calculated for keeping long positions open for atleast overnight.

When a trader believes that the currency will appreciate in the future, he goes for a “Long Position” with the underlying currency.

A long position means you buy a currency lot and set the selling price higher than the present position in the expectation that the currency price will improve later on.

**How to calculate swap long**

If you take a long position on EUR-USD by 1 standard lot on Thursday, and keep the position open overnight to close on Friday, The formula would be

Swap Long Charges = Standard lot x (pip x swap long interest rate)

= 100,000 x (0.0001 x -0.48) = -$4.8

Now if you take a long position on

3 Nights = 3 x (-4.8) = -$14.40

You have to pay $14.40 of interest.

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### #3. 3-Day Swap

The 3-day Swap or triple rollover occurs on Wednesday because most currencies need two business days to be settled (for all the financial transactions to be completed).

A forex trade executed on Monday settles on Wednesday. A trade that occurs on Tuesday, settles on Thursday.

A trade from Wednesday settles on Friday, but a trade from Thursday (Wednesday overnight also) settles on… the following Monday.

Since the banks are closed on Saturday and Sunday, the trade has to be rolled over through the weekend. That’s the reason 3x rollover interest is applied to FX trades open at 5 pm New York Time on Wednesday. Because it’s the beginning of the next trading day (Thursday) in the global FX market.

Not only Wednesday, but you also have to face rollover (either earn or pay) on any trading day post-Wednesday which is Thursday and Friday. Let’s discuss this with an example in the next part.

**How to calculate 3-day swap**

If you take a long position on Thursday that you close on Friday, you have to pay a 3-day swap for weekend rollover.

Swap rollover interest for 1 day –

Standard lot x (pip x swap long interest rate)

= 100,000 x (0.0001 x -0.48) = -$4.8

Triple rollover will add 3 more days of interest (Thursday to Friday is 1 night and Friday to Monday are 3 nights, so a total of 4 nights).

4 Nights = 4 x (-$4.8) = -$19.20

You have to pay $19.20 of interest for opening a position post-Wednesday.

**Also read** – Best time for forex trading in India

## Final Thoughts

I hope you have now understood** “what is swap in forex” **and if you are a beginner you should avoid carrying a position overnight not just on Wednesdays but any other days post-Wednesday including Thursday & Friday because, first of all, you might have to pay a rollover swap.

Secondly, you might not be aware enough of how the market would behave next week, a weekend open position might be a loss-making one if the market behaves negatively.