When trading forex, traders often come across the term ‘rollover’. Rollover is the process of carrying forward an open position to the next trading day. This process is also known as ‘swap’.
In forex trading, currencies are traded in pairs. Every currency pair has an interest rate associated with it. When traders hold a position overnight, they earn or pay interest on that position depending on the interest rate differential between the two currencies in the pair.
For example, if a trader buys a currency pair with a higher interest rate, they earn interest on the position. Conversely, if they buy a currency pair with a lower interest rate, they pay interest on the position.
The interest rate differential between the two currencies is the rollover rate. The rollover rate is calculated as the difference between the interest rate of the base currency and the counter currency.
Rollover rate is usually expressed as an annual percentage rate. However, in forex trading, this rate is applied on a daily basis. Therefore, the rollover rate is divided by 365 to get the daily rollover rate.
Rollover rates can be positive or negative. A positive rollover rate means that the trader earns interest on the position, while a negative rollover rate means that the trader pays interest on the position.
Rollover rates are determined by central banks and are subject to change based on economic conditions. For example, when central banks increase interest rates, the rollover rates for the currencies of that country are likely to increase as well.
Traders can check the rollover rates for their currency pairs on their broker’s trading platform. Rollover rates are usually displayed as a percentage or a dollar amount per lot traded.
It is important to note that rollover rates can significantly affect the profitability of a trade. A position held for a long period of time can accumulate substantial rollover costs or profits.
Traders should also be aware of the rollover time, which is usually at the end of the trading day. The rollover time can vary depending on the broker and the trading platform.
Traders can avoid paying rollover fees by closing their positions before the rollover time. However, this may not be practical for long-term trades.
In summary, rollover in forex trading refers to the process of carrying forward an open position to the next trading day. Rollover rates are determined by the interest rate differential between the two currencies in the currency pair. Rollover rates can be positive or negative and can significantly affect the profitability of a trade. Traders should be aware of the rollover time and the rollover rates for their currency pairs.
