How do swaps work in trading?

Swaps are financial contracts in which two parties agree to exchange cash flows or other financial instruments over a specified period. In trading, particularly in Forex, swaps, also known as rollover rates, occur when positions are held overnight. The difference in interest rates between the two currencies involved in the trade determines the swap's value. If the trader holds a long position in a currency with a higher interest rate, they may receive a positive swap, while a short position in a currency with a lower interest rate may incur a negative swap. Swaps can vary significantly based on broker policies, market conditions, and position size, and traders should understand their implications for total trading costs or potential returns.