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Rollovers in Forex Trading
Written by: PaxForex analytics dept - Friday, 11 August 2017 0 comments
The interest rate differential between a pair of currencies can either be your best friend or your worse enemy when trading forex since it affects forex rollover rates. Forex rollovers affect just about any trader that holds positions overnight, and can have an especially strong impact on a carry trade strategy. Furthermore, this important interest rate effect gets magnified in currency pairs that have a high interest rate differential between the currencies involved.
Rollover interest, otherwise known as rollover for short, is basically an amount of money paid or earned for holding a currency, or forex position, overnight. Let us call this amount of money 'interest' for now. When you buy or sell a currency in the forex market you are borrowing one currency to buy another. To hold this position overnight, or when your broker starts their new trading day, then interest has to be paid on the currency that is borrowed but it is also earned on the currency that is bought.
In forex, trading rollover is the course of action that moves the settlement date to the next day. It is relating to the interest that is paid or received (swap) in respect of holding an open position during the night or to the next date. Settlement date is the payment date and the trading markets identify the time period between the transaction date and the settlement date. More often than not transactions are settled in two business days after the execution of a transaction. Rollover is a cutoff point of the day and necessary to
determine the valuation for open orders with respect to the interest earned or lost (swap) and finance charges while using the margin account.
Liquidity providers, most global banks and financial institutions are closed on weekends and holidays, this does not allow you to close a trade over the weekend. The interests are still applied during these days, even if the banks are closed. The Rollover fee gets charged to your account on Wednesday, as the fee has a 2-day settlement period, therefore the weekend rollover is accounted 2 days later, on Tuesday night. The same applies on important holidays, as the Rollover fee is aggregated to the following day’s fees.
Interest rates change over time and a quick internet search will help you find what the interest rates are for all the countries' currencies you are trading. The amounts may differ slightly from what the broker uses as they have to take into account other factors like margin and the overnight rates they borrow up but in general the two points above is what you will experience when trading the forex market. Clearly all traders would like to be on the positive side of the rollover interest. This desire is what led to one of the most popular forex trading strategies in recent years - the Carry Trade. This basically takes advantage of the differences between the interest rates of different countries and profiting from the carry, or the rollover.