What is the meaning of “Swap” in Forex trading?

In Forex trading, swap refers to the interest charged (or paid) to your trading account, on a trade that’s held overnight.

Typically, the swap rate is based on the interest rate differential between the two currencies you’re trading.

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For example, if you went short the AUD/JPY and the interest rate of the AUD is higher than the interest rate of the JPY, you’ll have to pay the interest rate difference.

Conversely, if you went long the AUD/JPY you’ll receive the interest rate difference, since the AUD currency pays more interest than the JPY currency.

In practice, there is no official way for brokers to determine the swap rate.

Some brokers add a small percentage on top of the interbank overnight interest rate and update this rate daily, while others only update their Forex swap rate once every few days. Some brokers even offer trading accounts without swap rates in order to attract Islamic clients.

Keep in mind that in some circumstances, you’ll have to pay swap fees regardless of whether you are long or short a currency pair. This typically happens when interest rates are low in both the currencies you're trading.

As you can see, there are many ways to determine the Forex swap rate so the best way to be sure is to browse through you Forex broker’s website, as all reputable brokers will provide this information clearly.

For example, you can see Oanda’s swap rates and historical currency interest rates here and here.

Generally speaking though, swap rates are relatively small compared to trading profits and losses, so it’s not something most traders should worry about.

However, if you’re trading in large volumes or hold on to your trades for long periods of time, you’ll definitely want to go with a broker with competitive swap rates.

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