The 5pm rollover, also known as the daily rollover or overnight rollover, is an important concept in the forex market. It refers to the time at which a forex trade is automatically rolled over to the next business day.
In the forex market, trades are settled on a T+2 basis, which means that the settlement date for a trade is two business days after the trade date. For example, if a trade is executed on Monday, the settlement date would be Wednesday. However, most forex brokers automatically roll over trades at 5pm Eastern Standard Time (EST) each day, which means that trades executed on Monday would be rolled over to Wednesday at 5pm EST.
The reason for the 5pm rollover is that the forex market is a 24-hour market, which means that trading is continuous from Sunday evening through Friday evening. However, banks and other financial institutions that provide liquidity to the forex market are typically closed on weekends and on holidays. As a result, the settlement of trades that occur over the weekend, on holidays, or after market hours is delayed until the next business day.
The 5pm rollover is important because it affects the financing of forex trades. Forex trades involve the exchange of currencies, and each currency has an associated interest rate. When a trader buys a currency with a higher interest rate and sells a currency with a lower interest rate, they earn a positive carry, which is the difference between the interest rates. Conversely, when a trader buys a currency with a lower interest rate and sells a currency with a higher interest rate, they pay a negative carry.
The 5pm rollover affects the financing of forex trades because it marks the end of the trading day and the beginning of the next business day. At this time, the interest rate differential between the two currencies in a trade is calculated, and the trader either earns or pays the carry for holding the trade overnight. The amount of the carry depends on the size of the trade, the interest rate differential, and the duration of the trade.
Traders can use the 5pm rollover to their advantage by strategically entering and exiting trades at the appropriate time. For example, a trader who wants to earn a positive carry can enter a trade at the end of the trading day when the interest rate differential is in their favor, and exit the trade before the next 5pm rollover to avoid paying a negative carry. Similarly, a trader who wants to avoid paying a negative carry can enter a trade at the beginning of the trading day when the interest rate differential is in their favor and exit the trade before the end of the trading day to avoid earning a positive carry.
In conclusion, the 5pm rollover is an important concept in the forex market that affects the financing of forex trades. It marks the end of the trading day and the beginning of the next business day, and determines whether a trader earns or pays a carry for holding a trade overnight. Traders can use the 5pm rollover to their advantage by strategically entering and exiting trades at the appropriate time based on the interest rate differential between the two currencies in the trade.
