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Rollover In Forex
Rollover In Forex

What Is Rollover in Forex?

The value of each world currency is often tied to interest rates. Since forex involves betting on the value of one currency against another, trades deal with two different interest rates. And traders should pay attention to the payment applied when they hold a position overnight. Depending on the interest rate of the two currencies, you can either profit or lose money from it.

What is Rollover?

When conducting a transaction with banks in other countries, banks deal with foreign currencies and pay the interbank rate. It'll differ depending on the currency you hold in the forex market. Such interest rates will dictate the amount of rollover a trader will have to pay for an open position.

Rollover is the interest earned or charged for keeping an open position overnight.

Rollover is a popular, straightforward technique for forex trading. This applies to traders who don't want to take actual delivery of the currency they're buying but earn from exchange rate fluctuations instead.

Traders need to determine which currency offers a high and lower yield. When the markets close for the day, the position can generate profit if a borrowed currency has a lower interest rate. On the opposite side, traders might be charged if the purchased currency has a lower interest rate. If you don't want your positions to be subject to these calculations, you need to close them by the end of the day.

End of Day in Forex

Rollover transactions are carried out when a position is held open to the next value date. Therefore, rollover is linked to the terms trade and value date. There's also a need to determine what would count as the end of the day, taking into account different international markets.

The trade date or entry date occurs when a trader enters an order for purchasing/selling an asset, and the broker accepts it. When the trade settles, it's considered the value date, meaning when either party in the transaction receives or pays home currency in exchange for foreign currency.

But what is considered the end of the day if the working hours of the forex market spread across different time zones? In this 24-hour market, the community had agreed upon what is considered the end of the trading day. It's 5 pm Eastern Standard Time (EST). Open positions are considered overnight after 5 pm EST.

The forex trading day ends at 5 pm Eastern Standard Time (EST).

  • If you're in New York, rollover takes place at 5 pm.
  • For traders in London, it's 10 pm
  • If you're in Tokyo, positions are rolled over at 6 am the next day. 
  • For Sydney, it corresponds to 7 am the next day.

Rollover During Weekends and Holidays

The amount of interest will vary depending on how many days it took to roll over. Bear in mind that the rollover interest is calculated every day, including weekends and holidays.

Practically every bank in the world is closed on Saturdays and Sundays. Even with no rollover on the weekends, the rate is still charged/earned over these periods. The forex market will book an interest amount equal to three days of rollover on Wednesdays.

Interest rates still apply over the weekend, so the market will book an amount equal to three days of rollover on Wednesdays. 

Additionally, there are special conditions for holidays because of the banks. A holiday rollover normally takes place two days before the holidays. For example, before the US President's Day on 18 February, the rollover is calculated at 5 pm two days before that for all US dollar pairs. 

A holiday rollover normally takes place two business days before the holiday. 

Sometimes interest is calculated for four to five days. For example, when the rollover would be applied on the weekend.

Rollover Calculation

Rollover Calculation

To calculate the rollover rate, you need to know the following figures: position size, currency pair and the interest rate for each currency. Then, you apply the formula:

Rollover Rate = (Base Currency – Quote Currency)/365 x Exchange Rate

If the final value comes out positive, it indicates that a trader gained a profit overnight. A negative value means that the trader sustained a loss.

Here is how the daily rollover cost would play out in a hypothetical scenario (EUR/GBP 0.8):

  1. With a trade size of 100,000 units, a 2% annual EUR rate, 2.5% annual GBP rate, a trader holds a long position.
  2. Profit of 100,000 EUR x 2% = 2,000 EUR annually or 5.48 EUR at rollover.
  3. You will also need to pay 80,000 GBP x 2.5% = 2,000 GBP annually or 5.48 GBP (6.14 EUR) at rollover.
  4. Subtract the amount gained from the amount charged = 5.48 - 6.14 = -0.66 EUR (rollover cost).

Different Forex Rollover Rates Scenarios

The examples below show how the concept of rollover applies in different scenarios:

  • If you hold a long position (meaning, you own the currency) and the interest rate applied to the base currency is higher than the quote currency, you profit.
  • When you are shorting a position (selling an asset you don't own), the base currency can have a higher interest rate than the quote currency. In this case, you sustain a loss.
  • When you take a long position, and the base currency has a lower rate, that also means that you suffer a loss from the overnight charge.
  • Lastly, for a short position, the base currency can have a lower interest rate, in which case you make a profit.

Meaning of Rollover in Trading

Some traders use methods that rely on interest rate differences, namely in forex carry trading. They profit from taking a long position on currencies that offer a higher rate and short low-interest-rate currencies. But if your strategy depends on holding positions overnight, you need to always account for the rollover rates and any changes related to them.

When holding positions overnight, you need to always account for the rollover rates and any changes related to them. 

Normally, market conditions ensure the relative stability of the roll rates. However, this method still comes with certain drawbacks. For example, the interbank market becomes more sensitive to borrower risk, and the roll rates can change significantly day to day. Besides, traders sometimes face the risk of a sharp decline in the currency price. The Central Bank Calendar shows changes in interest rates, which often cause rollover rates to fluctuate.

The Central Bank Calendar shows changes in interest rates, which often cause rollover rates to fluctuate.

Let's say the interest rate in New Zealand is 4% and the interest rate in the US is 1.5%. When you purchase NZD, the interest rate is 2.5%. If you hold a $100,000 lot for a year, you'll make $2,500 without doing anything else. It sounds great, but there's a catch.

The potential for fluctuation can go as high as 20% throughout the year. So, if you fully rely on interest to gain profits from trading, you might have a difficult time. With the fluctuations, you could lose a lot more than 2.5% if NZD begins to fall against the USD. For this reason, traders focus on getting daily gains from the forex rollover strategy rather than keeping the position open for long periods of time.

Conclusion

If you open and close a forex position within the day, you won't be subject to a rollover. You can leave an open position overnight if you want to continue with the trade, and you expect the rollover rate to be positive. But if you have reason to believe it'll be negative (for example, with emerging market currencies), you should close it before the end of the day.

Rollover can be effective, but it can also bring losses. Therefore it is better not to depend on interest gains entirely but to explore other venues of trading. You can make this happen with a CFD broker Libertex. The platform offers educational materials so that you can start trading with the necessary knowledge.

There's no denying that having access to many currency pairs gives you more options. But with Libertex, you can also trade a range of other assets. Along with forex CFDs, the platform covers Stocks, Crypto, Metals, Indices, Agriculture, Oil and Gas and ETFs on CFDs.

You can open a demo account and test-run the platform. It will definitely convince you to conduct your trading with Libertex. It's user-friendly and offers highly favourable terms.

Disclaimer: The information in this article is not intended to be and does not constitute investment advice or any other form of advice or recommendation of any sort offered or endorsed by Libertex. Past performance does not guarantee future results.

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