The value of each world currency is often tied with its interest rates. Since you’re betting on the value of one currency against another, trades involve two different interest rates. And traders should pay attention to the payment, which is applied when you 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 nations, banks deal with foreign currencies and pay the interbank rate. The interbank rate will differ depending on the kind of 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.
Using rollover for profit is a useful technique for Forex trading. This applies to traders who don’t want to take actual delivery of the currency they are buying but earn from exchange rate fluctuations instead.
Traders need to determine which currency offers a high yield and which offers a lower one. 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 for the interest rate 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 being held open to the next value date. Therefore, rollover is linked to the terms trade and value date. There is 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 is 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 travel across different time zones? In this 24-hour market, the community had agreed upon what is considered the end of the trading day. Following the established practice, the trading day ends at 5 p.m. Eastern Standard Time (EST). Open positions are considered overnight after 5 p.m. EST.
The Forex trading day ends at 5 p.m. Eastern Standard Time (EST).
- If you are in New York, rollover takes place at 5 p.m.
- For traders in London, it will be 10 p.m.
- If you are in Tokyo, positions are rolled over at 6 a.m. the next day.
- For Sydney, it corresponds to 7 a.m. the next day.
Rollover During Weekends and Holidays
The amount of interest will vary depending on how many days it took to rollover. Bear in mind that the rollover interest is calculated every day, which includes weekends and holidays.
Practically every bank in the world is not open on Saturdays and Sundays. Even with no rollover on the weekends, the rate is still charged/earned over these periods. This means that 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. To account for that, a holiday rollover normally takes place two days before the holidays. For example, before the US President’s Day on February 18, the rollover is calculated at 5 p.m. 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.
Forex Rollover Calculation
In order 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):
- With a trade size of 100,000 units, a 2% annual EUR rate, 2.5% annual GBP rate, a trader holds a long position.
- Profit of 100,000 EUR x 2% = 2,000 EUR annually or 5.48 EUR at rollover.
- You will also need to pay 80,000 GBP x 2.5% = 2000 GBP annually or 5.48 GBP (6.14 EUR) at rollover.
- 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 make a profit.
- When you are shorting a position (selling an asset you do not 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 difference, 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 from 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 USA is 1.5%. When you purchase NZD, the interest rate is 2.5%. If you hold a $100,000 lot for a year, you will make $2,500 without doing anything else. It sounds great, but there is 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.
If you open and close a Forex position within the day, you will not 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 will be negative (for example, with emerging market currencies) you should close it before the end of the day.
Profit from rollover can become an additional form of income. But traders are advised not to depend on interest gains entirely but rather explore other venues of trading. You can make this happen with an internationally regulated Libertex Broker. The platform offers educational materials so that you can start trading with the necessary knowledge.
There is 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 to diversify your portfolio. Along with Forex, the platform covers Stocks, Crypto, Metals, Indices, Agriculture, Oil and Gas, and ETFs.
You can open a demo account and test-run the platform. It will definitely convince you to conduct your trading with Libertex – it is reliable, user-friendly, and offers highly favorable terms.
Why to trade with Libertex?
Libertex offers all its affiliates:
- access to a demo account free of charge
- technical assistance to the operator 5 days a week, 24 hours a day
- leverage up to 1:500
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- no commissions for extractions in Latin America