Overnight risk, weekend gaps and swap costs

Holding positions for days brings two things that intraday traders mostly avoid: overnight financing, called swap or rollover, and the risk that price jumps while the market is closed. Both can change the result of a swing trade, so they belong in your plan before you enter.

What swap is

When you hold a leveraged forex position past the daily rollover time (commonly 5pm New York time), your broker applies a swap. In simple terms, a forex position means holding one currency and owing the other. You earn interest on the currency you are long and pay interest on the currency you are short.

The swap you see reflects two parts:

1. The interest-rate differential between the two currencies, based on short-term market rates rather than exactly on central bank rates.
2. The broker's markup, which reduces any credit and increases any charge.

Because of the markup, it is common for both a long and a short position on the same pair to pay swap when the interest differential is small. Brokers usually publish swap rates per lot in their contract specifications, and the figures change as interest rates move.

Worked example: an illustrative swap calculation

The figures below are illustrative only. Real swap rates vary by broker and change over time, and brokers calculate them in their own ways. This simplified model shows the logic.

Imagine a pair where:

• the base currency's interest rate is 5.0% a year and the quote currency's is 2.0% a year, a differential of 3.0%;
• the broker applies a markup of 1.0% a year to each side;
• the example price is 1.2000, and the quote currency is USD.

One standard lot is 100,000 units of the base currency, so the notional value is 100,000 × 1.2000 = 120,000 USD.

The Wednesday triple

Spot forex normally settles two business days after the trade. A position rolled over on Wednesday night therefore carries over the weekend, so many brokers apply three days of swap on Wednesday night. Check your broker's specification, as practice differs between brokers and instruments.

Holding for one full week means five rollovers, one of them a triple, so seven days of swap in total:

• Long: 7 × 6.58 = about 46 USD credit.
• Short: 7 × 13.15 = about 92 USD charge.

If your risk on that trade were 100 USD, a 92 USD swap charge would be almost one full unit of risk spent on financing alone. Over several weeks, swap can matter as much as the spread.

Now change one input. If the differential were only 0.5% with the same 1.0% markup, the long would pay 0.5% (0.5 minus 1.0) and the short would pay 1.5% (0.5 plus 1.0). Both sides pay.

Weekend gaps

The forex market closes from Friday evening to Sunday evening (exact hours depend on your broker's server time). News over the weekend, such as elections or policy announcements, can make the market reopen at a different price from Friday's close. This jump is a gap.

A stop-loss is an instruction to close at the next available price once the stop level is reached. If the market opens beyond your stop, the order fills at or near the opening price, not at your stop.

Worked example: a gap through a stop

Illustrative EUR/USD prices. 1 pip on 1 standard lot is worth 10 USD.

• Long 0.2 lots at 1.1000, stop at 1.0950: a 50-pip stop.
• Planned risk: 0.2 × 50 × 10 = 100 USD.
• Market closes on Friday at 1.0980 and reopens on Monday at 1.0900.
• The stop fills near 1.0900, a loss of 100 pips.
• Actual loss: 0.2 × 100 × 10 = 200 USD, twice the planned risk.

The same can happen overnight during the week around major scheduled news.

Managing overnight and weekend risk

• Check swap before entering, especially if you expect to hold for weeks.
• Know the calendar. Note central bank decisions and major data releases that fall within your expected holding period.
• Reduce exposure into weekends by trading smaller, taking partial profits, or closing positions you would not want to hold through a gap.
• Use sensible leverage. Margin requirements can change, and a gap that hits a highly leveraged account can do disproportionate damage.

Leveraged trading carries a high level of risk, and most retail CFD accounts lose money.

Key takeaways

• Swap reflects the interest-rate differential between the two currencies plus the broker's markup.
• Because of the markup, both long and short positions can pay swap on the same pair.
• Many brokers charge three days of swap on Wednesday night to cover the weekend.
• Stops are not filled at their level if the market gaps through them; losses can exceed planned risk.
• Build swap and gap risk into the plan before entering, not after.