You’ve mastered the basics of forex trading, but here’s a question: what happens when you leave a trade open overnight? Unlike you, the forex market doesn’t sleep! 

This is where swaps come into play.

What are swaps?

Think of swaps as the forex world’s version of interest payments. When you trade currency pairs, you’re essentially borrowing one currency to buy another. And just like with any loan, there’s interest involved. Depending on your trade, swaps could either add to your profits or chip away at them overnight.

Earning vs. paying swaps

Whether you earn or pay interest (swaps) depends on a few key factors:

• Interest Rates: Each currency has an interest rate set by its country’s central bank. The bigger the difference, the more impact it has on swaps.
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• Your Position: If you buy a currency with a higher interest rate than the one you sell, you could earn interest. But if you’re on the wrong side of the rate difference, you might pay interest instead.

Quick example: EUR/USD swaps

Imagine you’re trading the Euro (EUR) against the US Dollar (USD):

• Scenario 1: Euro’s Interest Rate is Higher
  
  • Buy EUR/USD: You’re borrowing USD (low interest) to buy EUR (high interest). You might earn interest overnight.
  • Sell EUR/USD: You’re borrowing EUR (high interest) and holding USD (low interest). You’ll likely pay interest.

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• Scenario 2: US Dollar’s Interest Rate is Higher
  
  • Buy EUR/USD: You’re borrowing the high-interest USD to buy the low-interest EUR. You’ll probably pay interest.
  • Sell EUR/USD: You’re borrowing euros (low interest) and holding dollars (high interest). You might earn interest overnight!

How much are swap charges?

Swap fees or earnings aren’t massive per trade, but they can add up over time. The exact amount depends on:

• The interest rate difference between the two currencies.
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• The size of your trade (bigger trades mean bigger swaps).

How long you hold your position (the longer you hold, the more impact swaps have).

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Smart swap strategies

Want to make swaps work for you instead of against you? Here’s how:

• Pick your currency pairs carefully – Favor pairs where the interest rate difference works in your favor.
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• Stay updated on central bank policies – Interest rates change, so keep an eye on news that could affect swaps.
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• Consider a carry trade strategy – Some traders specifically choose trades to profit from swaps over time.

Swaps are an unavoidable part of forex trading, but if you understand them, you can use them to your advantage. A well-planned strategy could help you earn passive income while you sleep!

Want to learn more? Head over to Deriv Academy for in-depth forex courses, or test your strategies on a demo account before trading live.