In Forex, all trades have a timeline of two days. If, at the end of that period, a trader wishes to remain in a trade rather than settle up for the amount they’ve borrowed, they must pay interest to retain those funds and hold their position for another day. The “swap rate” represents the interest rate differential between the two currencies being traded. Because interest rates are influenced by market conditions, swap rates are constantly in flux.
If you know the current swap rate for a currency pair, you can calculate the swap or “rollover” fee you’ll owe or accrue if you decide to hold your position overnight. This knowledge will help you understand the costs of holding your position open and allow you to weigh those costs alongside potential risks and rewards to mitigate risk.
To accurately calculate the swap fee for a currency pair, you need to know the current swap rate for the currency pair in question, your net pip value on that trade, and the number of days you’d like to hold your position. Although it may sound like a lot to navigate, the formula for calculating swap fees is fairly straightforward:
Swap = (pip value) x (swap rate) x (number of nights)/10
In Forex, pips are units of measurement used to reflect the spread (positive or negative) between the two currencies being traded. Gains or losses in Forex are expressed in terms of pip movement (positive or negative) relative to the trader’s initial position. The dollar value of a single pip is dictated by the size of your position (i.e., how much of a given currency that you’ve purchased) and the current exchange rate for the currencies in question. For the purposes of calculating swap/rollover fees, you should always use your initial pip value (expressed in terms of your base currency) as opposed to the actual number of pips gained or lost. In other words, if you entered the trade at 25 pips, you should convert that sum into a dollar amount (your base currency) before using it to calculate swap fees.
The current swap rates for different currency pairs should be calculated by your brokerage and made available to you each day through your trading account. When looking to calculate rollover/swap fees, locate the current swap rate for your currency pair and plug that number into the formula above.
Number of Nights
This part of the formula addresses the number of additional days you’d like to hold your position. In Forex, interest is typically charged at a daily rate, but the time at which those charges are processed may vary between brokerages. For example, some brokerages will charge interest based on the position a trader is holding at 5:00 pm, while others will give traders until midnight of the trading day before processing swap fees.
Imagine that you’re trading EUR/USD. At the end of the two-day trade, your net pip value is $12, the current swap rate for EUR/USD (as listed by your brokerage) is 0.35, and you want to determine how much it will cost you to keep your position open another day. Your calculation would look as follows:
Swap fee = (12) x (0.35) x (1)/10
Swap fee = $0.42
Here's another example:
Interpreting Your Calculations
Of course, with a bigger lot size, the swap costs will be significantly greater. Before you decide to hold your position, you should always examine the direction and strength of the current trend and use that information to anticipate how long you will likely need to remain in the trade in order profit. In other words, how much will you need to earn to cover the initial borrowed amount and then some? At the same time, use the swap fee formula to estimate how much it will cost you to hold your position for that period if interest rates remain fairly constant. Keeping these numbers in the back of your mind will help you quantify risks and rewards and inform your decisions about when to settle and when to wait out small downturns that defy the overall trend.
The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.