Forex rollover refers to the process of extending the settlement date of an open position in the foreign exchange market. In forex trading, when you hold a position overnight, it’s subject to an interest adjustment or swap, which is known as a rollover.
Here’s how it works:
- Interest Rate Differentials: Rollover occurs due to the interest rate differentials between the currencies in a currency pair. Each currency has an associated interest rate set by its respective central bank. When you trade forex, you’re essentially borrowing one currency to buy another, and the interest rate differential between these two currencies affects the rollover.
- Long and Short Positions: If you’re trading a currency pair, you’re simultaneously buying one currency and selling another. Depending on the interest rate differential between the currencies, you may either receive or pay a rollover interest.
- Long Position: If you’re buying a currency with a higher interest rate (in a currency pair), you may earn rollover interest.
- Short Position: If you’re selling a currency with a higher interest rate (in a currency pair), you might pay rollover interest.
- Rollover Calculation: Rollover rates are calculated based on the interest rate differential between the two currencies in a pair and are usually expressed in pips. Brokers typically offer a rollover rate for both the buy and sell side of a currency pair.
- Rollover Time: Rollover occurs at the end of the trading day (usually at 5 pm New York time) and is commonly referred to as the rollover or swap time.
It’s important to note that rollover can either add to your trading account or deduct from it, depending on the direction of your trade and the prevailing interest rate differentials. Traders should be aware of the rollover rates offered by their broker, as these rates can affect the overall profitability of positions held overnight.
Additionally, some traders utilize rollover as a part of their strategy, aiming to benefit from interest differentials by holding positions that align with higher yielding currencies. However, it’s crucial to consider the risks involved and the impact of rollover on your trading strategy and overall risk management.