Forex course · Section 2: Brokers, Leverage and Orders
Forex Swaps, Rollover and the Carry Trade Explained
Why your broker charges or pays a swap when you hold a forex trade overnight, how to estimate it, the triple swap, and how the carry trade works and fails.
Beginner6 min read·6:38 video·Lesson 9 of 26·quiz: 4 questions
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A swap, also called rollover, is the interest your broker credits or charges when you hold a forex position past the daily cutoff at 17:00 New York time. It reflects the gap between the interest rates of the two currencies, minus the broker's markup: you earn a little if you are long the higher-yielding currency and pay if you are long the lower-yielding one. The carry trade is a strategy built on earning that gap, and it works until markets panic.
Why holding a trade overnight costs or pays interest
When you buy EUR/USD, you are in effect holding euros and borrowing dollars. Each currency has its own interest rate, set mainly by its central bank (see Interest Rates and Central Banks). Holding a currency earns its rate; borrowing one costs its rate. The broker "rolls" your position to the next settlement date each night and passes on the difference, after taking a markup.
- Long the higher-rate currency: usually a small credit (positive swap), shrunk by the markup.
- Long the lower-rate currency: a charge (negative swap), enlarged by the markup.
- If the rates are close, both directions can show a charge because of the markup.
Positions opened and closed within the same day, before the cutoff, pay no swap.
Estimating a swap
Brokers publish their swap rates in the platform (often in "points" per lot or money per lot). To understand where they come from, use:
Daily swap ≈ position value × (base rate − quote rate ± broker markup) ÷ 365
Example
The rates below are assumptions for illustration, not today's rates. Suppose the Australian dollar rate is 4.00% and the Japanese yen rate is 0.50%, and your broker takes a 1.00% markup each way.
- Long 1 lot AUD/JPY (100,000 AUD): earns 4.00 − 0.50 − 1.00 = 2.50% a year. Daily: 100,000 × 2.50% ÷ 365 = 6.85 AUD, about 4.45 US dollars at AUD/USD 0.65.
- Short 1 lot AUD/JPY: pays 4.00 − 0.50 + 1.00 = 4.50% a year. Daily: 100,000 × 4.50% ÷ 365 = 12.33 AUD, about 8.01 US dollars.
Over a year the long side earns about 2,500 AUD, or 2.5% of the position value. With AUD/JPY at 100.00, a 2.5% fall is 2.50 yen, which is only 250 pips.
The triple swap
Spot forex normally settles two business days after the trade (USD/CAD settles one day after). When a position is rolled on Wednesday night, its settlement date jumps from Friday to Monday, so it carries interest for three nights. Most brokers therefore charge or pay three days of swap on Wednesday for currency pairs. Some instruments, such as metals or indices, use a different day. Check your broker's specification.
Tip
If you hold a pair with a negative swap, a Wednesday close is three times as expensive as a Tuesday close. Swing traders who hold for weeks should add expected swaps to their cost estimate before entering.
How swaps affect longer-term trades
Swaps look tiny per night but add up for trades held for weeks:
Example
You short 0.50 lot of a pair with a charge of 6 dollars per lot per night. That is 3 dollars a night, about 21 dollars a week including the triple Wednesday and about 90 dollars over a month. If your stop risks 100 dollars, the swap on a one-month hold costs almost as much as a full losing trade.
This is also why backtests that hold trades for days or weeks must include swaps. See How to Backtest a Forex Strategy.
The carry trade
The carry trade means buying a high-interest currency against a low-interest one and holding it to collect the interest gap. For many years the yen and the Swiss franc were common "funding" currencies because their rates were very low, and currencies such as the Australian and New Zealand dollars, and many emerging-market currencies, were common "target" currencies.
Your return has two parts:
Carry trade return = interest gap earned (swaps) + change in the exchange rate
The idea relies on the high-rate currency not falling by more than the interest you collect. Economic theory (uncovered interest parity) says it should fall by exactly that amount on average. In practice, high-yielders have often not fallen that much for long stretches, which is why the carry trade can earn steady income for months or years. But it has a well-known weakness.
Why carry trades crash
Carry trades tend to unwind all at once when investors become frightened. Everyone sells the high-yielders and buys back the funding currencies at the same moment, so the price drop can erase years of interest in days.
- In 2008, during the global financial crisis, AUD/JPY nearly halved between its 2007 high and its low in October 2008.
- In July and August 2024, after the Bank of Japan raised rates and US data weakened, USD/JPY fell from above 160 in early July to about 142 in early August as yen-funded positions were closed.
Traders describe carry as "picking up pennies in front of a steamroller": many small gains, occasional large losses. Leverage makes the losses worse, and a stop-loss can be filled far below its level during these moves.
Risk
A positive swap does not make a trade safe. If you earn 2.5% a year but use 10x effective leverage, a 5% fall in the pair costs you 50% of your account. Size carry positions for the crash, not for the income.
Swap-free (Islamic) accounts
Many brokers offer swap-free accounts for clients who do not want to pay or receive interest. These remove the overnight swap but often add a fixed daily or weekly admin fee after a few days, wider spreads or limits on which pairs you can hold. Whether a particular account meets religious requirements is a question for qualified scholars, not for your broker's marketing page. Read the terms before choosing one, and include its fees in your cost estimates.
Carry as a trading style
Carry is one of the classic currency "styles", alongside value and momentum. We look at how these styles are built, why they are hard to profit from in practice after costs and swaps, and what testing shows in Forex Trading Strategies.
Next: the order types you will use to enter and exit trades in Forex Order Types.
Key takeaways
- A swap (rollover) is the overnight interest charge or credit on a forex position, based on the interest-rate gap between the two currencies minus the broker's markup.
- Long the higher-yielding currency usually earns a small credit; long the lower-yielding one usually pays.
- Most brokers charge three days of swap on Wednesday night to cover the weekend.
- The carry trade earns the interest gap but is exposed to sudden, large reversals when markets panic.
Quiz: check what you learned
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