Swing and position trading

The word swap comes from the interest paid or earned for holding a currency pair overnight. Every currency pair has two interest rates attached to it, one for each currency. When you hold AUD/USD, you are effectively long Australian dollars and short US dollars. The difference between those two interest rates is passed to you as a daily charge or credit. The platform shows this as a swap rate, usually in points or in your account currency per lot.

On the platform, the swap rate appears in the instrument specification window. It is listed as swap long and swap short, because the charge depends on which direction you hold. For AUD/USD, the long swap and short swap are rarely the same number. One side may pay you a small credit and the other may charge you. The platform applies the swap automatically at a set rollover time, usually once every 24 hours. That time is based on the broker's server clock, not yours.

The swap rate is not fixed. It moves as the interest rate expectations for each currency change. A central bank speech or a inflation report can shift the swap rate for the next night. The platform updates the figure without warning. If you plan to hold for several nights, the rate you see today is only an estimate for tomorrow. Some brokers publish a swap calendar, but the actual charge is applied at rollover and may differ from the forecast.

The formula is simple. Swap cost equals the swap rate per lot multiplied by the number of lots, then multiplied by the number of nights. If the swap rate is quoted in points, you convert it to money using the pip value for that lot size. For 0.10 standard lots of AUD/USD, one pip is A$1.00. A swap rate of 1.6 points per night becomes A$1.60 per night. That is the figure used in the examples on this page.

An overnight gap is the difference between the closing price and the next day's opening price. It happens because the market does not trade continuously. When a major news event occurs outside your trading hours, the price can jump when the market reopens. Your stop-loss order, if you have one, may not be filled at the level you set. It may be filled at the first available price, which can be much worse. This is called slippage, and it is a normal feature of holding positions overnight.

The size of the gap varies. On AUD/USD around 0.6640, a typical overnight gap might be a few pips. But around central bank meetings or economic data releases, the gap can be tens of pips. The platform cannot protect you from a gap because there is no trading during the gap. A stop-loss becomes a market order when the market reopens, and it fills at the best available price. That price may be far from your stop level.

Weekends add another layer. Most brokers close the market on Friday evening and reopen on Sunday evening or Monday morning, depending on the time zone. During that closure, news can break that moves the price when trading resumes. Some brokers charge a triple swap on one weekday to account for the weekend. The triple swap is not a separate fee; it is the normal swap for three nights charged on a single night. The day it is charged varies between brokers, so check the instrument specification.

Holding over a weekend means you are exposed to any event that occurs while the market is closed. That exposure cannot be managed with a stop-loss. The only control you have is the size of the position. A smaller position means a smaller loss if the market gaps against you. Some traders close positions before the weekend for this reason. Others accept the risk, but they size the position so that a large gap would not wipe out their account.

Position sizing for a swing trade starts with the total swap cost you expect to pay. If you plan to hold for five nights and the swap is A$1.60 per night per 0.10 lots, then each 0.10 lots costs A$8.00 in swap alone. That cost is fixed once you enter, unless the swap rate changes. Your gross profit must exceed that amount before you break even. The market must move in your favour by at least the number of pips that equals the total swap.

To find that number, divide the total swap by the pip value. For 0.10 lots of AUD/USD, the pip value is A$1.00. A total swap of A$8.00 equals 8 pips. So the price must move 8 pips in your favour just to cover the swap. If your analysis suggests a 20-pip move, your net gain before other costs is 12 pips. If your analysis suggests a 10-pip move, the swap eats most of it. The trade may not be worth placing.

The same logic applies to the spread. You pay the spread when you enter and when you exit, so it is a round-trip cost. On AUD/USD, the spread might be 1 pip. That is another A$1.00 per 0.10 lots. Add the spread to the swap and you have the total cost before any profit. For a five-night hold, the total cost could be A$9.00, or 9 pips. Your expected move must be larger than that.

A common mistake is to size the position based only on the stop-loss distance. If your stop is 30 pips away, you might think a 0.10 lot position risks A$30.00. But if you hold for five nights, the swap adds A$8.00 to that risk. The true risk is A$38.00 plus any slippage on the stop. To keep the same risk, you would need to reduce the position size. The platform does not do this for you. You must calculate it yourself before you enter.