What is Rollover in the Forex Market?

Hello traders! This week’s newsletter finds me relaxed and refreshed as I just took a month off from teaching and took a small road trip through Colorado, New Mexico, and Texas to see some friends, relatives, and the beautiful scenery. One of the great perks of being a trader is the freedom of time to just get up and go at a moment’s notice. I hope every one of you can do this as well! The actual topic of this week’s newsletter isn’t about vacations, but about an interesting quirk in the spot forex market called “rollover.” Let’s get to it!

First of all, let’s define what “rollover” is, and as usual, we’ll use Investopedia.com to get started.

Rollover – Move a forex position to the following delivery date, in which case the rollover incurs a charge. The forex fee arises from the difference in interest rates between the two currencies underlying a transaction. Sometimes investors can earn a credit if they are purchasing the currency with the higher of the two interest rates. Investors are often required to maintain certain margin positions with their brokers to earn a credit from rollover.

In essence, at 5pm EST, the broker is closing your position and re-opening it; at the same time, he is either crediting your account or debiting your account based on the short term interest rate differential that banks charge to borrow unsecured funds on an overnight basis. (That is quite a mouthful!) Please note that these rates are NOT based on central bank rates commonly found on forex trading websites.

Because we are trading currency PAIRS, one currency will usually have a higher interest rate than the other for this purpose. If you are long the currency with the higher rate, your broker will pay you at rollover; if you are short the currency with the higher rate, your broker will charge you for holding that position. So far so good, right? Here is where it gets extra tricky.

Because forex is generally a two-day deliverable market, meaning your position doesn’t actually “settle” until two business days after you open the position, your rollover money for most trading days will be at a similar rate, for example $1 per lot. However, since banks aren’t open on Saturday and Sunday, and the banks will probably still charge you the interest for those two days, your rollover rate on Wednesday will be triple what the other rollover monies will be.

So how can we use the rollover to help us make more money in the market? If you are a very short term trader, a daytrader, for example, you probably won’t care what the rollover rate is if you are out of your trades by 5pm EST. However, what about longer term traders? There are many traders who will only trade from the positive side of the rollover equation if they will be holding trades for days, weeks, or months at a time. Let’s take a look at a table to determine what that means.

In this FXCM screenshot, it shows four currency pairs, their bid and ask prices, the width of their spreads, high and low on the day so far and the rollover interest for the sell side, and rollover interest on the buy side. I’m looking for the largest positive number to make money longer term with the rollover interest payments. Obviously, you can see the largest number is on the buy side of the NZDUSD. This 0.41 means that you will get paid forty one cents for every rollover day that you hold a micro lot of the currency pair on a long trade. Not much on a single day trade, but what about if you hold that trade for a year? That would be $149.65 in the year-not a bad percent return on this micro lot trade!

However, please don’t think you just found the Holy Grail in forex trading, expecting to almost double your money by piling into this pair. We still must consider where we are on the chart. If you take a look at the NZDUSD on a daily chart, we’ve been in a significant downtrend for months, losing hundreds of pips over the last year. The extra few cents a day is small consolation when you are getting crushed by being on the wrong side of the trend!

So what did we learn this week? That the spot market has another way to earn money, by being on the right side of the interest rollover payment. Wednesday’s payment is 3 times the other days because of the weekend/two day settlement; but this interest payment can’t overcome a strong trending market going the wrong way!

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