FX swap rates differences between currencies
FX swap charges vary greatly depending on the pair you are trading. These rates are also different from broker to broker. Major pairs usually have smaller, more predictable forex swaps because their interest rate differences are relatively stable. Minor pairs have slightly wider rates, while exotic currency pairs can have very large FX swap charges due to big interest rate gaps and much lower liquidity.
FX swap rates differences among different currency types:
- Majors - Lower swap costs
- Minors - Medium swap rates
- Exotics - Usually high swap rates
Sometimes, there are triple swaps on Wednesdays, which compensate for the weekend rollover. If you are holding long-term swing trades, Wednesday becomes an important day to watch closely. Exotic pairs like USD/TRY and USD/ZAR can produce extremely high swaps, sometimes positive, and often negative, so they should be traded very carefully when you leave positions open overnight.
Short vs long swap
A short swap applies when you short the pair, and a long swap applies when you buy a long currency pair. Because each direction has its own interest rate impact, the difference can be large, even for the same pair on the same day.
This is where carry trading comes into play. Traders who focus on earning positive swaps will choose pairs where they can collect daily interest by holding the higher-yielding currency.
However, carry trading works when the market goes in their favor; otherwise, losses from price movements can wipe out the swap profits.
Calculating Forex swap
While each broker uses slightly different formulas, most swap calculations follow a simple pattern. The simplified formula is as follows:
Swap = (Contract Size × Swap Rate × Days Held) / 10
Main variables:
- Contract size - Lot size (1 standard lot = 100,000 units of a currency)
- Swap rate - The broker’s daily long or short rate
- Day held - number of rollovers
- Direction - Long or short
Swaps usually are small amounts depending on the lot size, but when you hold open trades for 15-30 days, it can make a big difference, especially if you have several positions opened at once.
FX swap rates play a crucial role in swing trading and trend trading, and it is necessary to monitor them when you deploy systems that are expected to stay in open positions for several days. Forex swap rates change frequently depending on the macroeconomic factors mentioned above, requiring traders to check them daily, unless you are trading on an Islamic account.
FX swap rates - Islamic accounts
Sharia laws prohibit interest rates in trading and financial transactions. As a result, swap rates can not be applied to traders who need commission-free trading. As a result, there is a dedicated account type that does not charge swap rates. These account types are called Islamic accounts, and they usually come with slightly higher spreads to make up for the 0 swap fees they provide to Sharia law followers. Traders who apply for Islamic traders can use trend trading and swing trading strategies without any extra costs because of FX swap rates, which is a huge advantage.
Forex swap trading strategies
The most popular swap trading method is carry trading, but there are several other strategies built around earning or avoiding overnight interest. These strategies are only useful for traders who have an understanding of swap rates, interest rate trends, and the long-term direction of currency pairs. Let’s explain several most popular and viable Forex swap trading systems in more detail.
Classic carry trading (most popular system)
Carry trading is the foundation of all swap trading approaches. The basic idea is very simple: you buy a higher-yielding currency and sell the lower-yielding one so you can collect daily positive swaps. Popular pairs often include AUD/JPY, NZD/JPY, USD/TRY, and AUD/USD. JPY (Japanese yen) pairs are popular because Japan has lower rates than other currencies, which enables Japanese traders to borrow money very cheaply (near 0%) and invest it in overseas assets. As a result, the pairs mentioned above traditionally offer the largest interest rate differences. Here is how it works: open a position where the long side pays interest. Each night, your swap is added to your account when positive. Pros include consistent daily interest rate generation, high profitability during stable trends, and usefulness in long-term trading. However, the cons are also multiple: price can move against you and erase swap profits, sharp interest rate changes or central bank decisions can reverse trends quickly, and exotic pairs can be volatile and risky. When both fundamental and technical trends support your direction, a carry trade is the best strategy to deploy.
Trend-following carry trade (swap + trend combination)
Forex swaps can provide additional backwind when you use a trend following strategy, and swap rates are also on your side. This strategy combines swap income with trend trading. Instead of entering a trade solely for positive swap rates, traders wait until the pair is also moving in their favor technically. Here is how it works: identify a currency pair where long swaps are positive, confirm an uptrend using technical tools like moving averages, breakouts, or similar, and hold the position long-term to collect swap earnings while benefiting from the main trend. This strategy is basically an improved version of the carry trading strategy, as it also adds trend trading for huge potential winners.
Interest rate prediction strategy
This system is based on anticipating central bank interest rate changes, as swap rates often increase or decrease ahead of major policy decisions. In this system, traders follow economic news and central bank announcements. If a country is expected to raise rates, its currency becomes more valuable. Traders usually position themselves to earn future positive swaps and potential price swings. Works best for fundamental traders who are comfortable with macro analysis.
Swap arbitrage (only for pros)
Swap arbitrage is another forex swap trading system that tries to exploit differences in swap rates between brokers. Swap values usually vary from broker to broker, and sometimes it is possible to open opposing positions across two brokers and collect a net positive. However, this is a very rare occurrence and is not consistent, and some brokers do not allow such practices. So, sticking with other strategies in this guide is a better idea.
Positive swap grid trading
If you love grid trading systems, this is the method to go. It combines grid trading with positive swap rates. The only disadvantage here is that grid trading systems are very risky and are only recommended for very experienced traders. This system is simple: traders choose a pair that pays a positive swap on long or short positions. They place multiple grid entries within a price range. The system collects swap on all open positions while also profiting from small price changes. Since it leaves grid positions open overnight, this system is best for slow-moving pairs with a clear long-term trend and small volatility.
Long-term diversified forex swap trading system
Some traders go as far as to build a portfolio of positions that pay swaps rather than focusing on a single trade. A Forex swap portfolio simply means you can include several traders like AUD/JPY long, NZD/JPY long, and USD/MXN short. This way, traders are able to spread risks across several interest-bearing pairs and stabilize returns. If one pair fails to perform, others will make up for it, which makes this strategy relatively safe. However, it requires a trader to understand several pair fundamentals and calculate several pair swaps.
Low-swap avoidance strategies
Some traders build techniques to avoid negative forex swaps, especially swing traders who hold positions for days. For swing traders, negative swaps can increase trading costs, and it is best to avoid these extra costs. If they have to open a trade with negative swap pairs, they might select pairs with the lowest negative swap rates. It is also best to avoid exotic pairs and to exit trades before Wednesday to avoid triple swap costs.