In case of positions being held overnight, trades made with brokers are subject to recieving interest or being debited interest.. This is known as roll over interest. So what does one need to know about Roll Over Interest. Let us check out!
What Is Rollover Interest in Forex Trading?
Rollover interest is paid or debited to traders who have open currency positions at 5pm Eastern Standard Time each day the trade is open. Trades opened before 5pm Eastern Standard Time and held until after this time are considered to be held overnight and thus are subject to interest credit or debits depending on the position the trader has open.
Whether a credit or debit is set to the trader's account is determined by which country's currency the trader bought or sold relative to another country's currency. All currencies trade in currency pairs, meaning one country's currency is always relative to another country's currency. An example of this is the USD/EUR. Therefore, the amount of interest received by the trader for holding the EUR/USD pair overnight will be determined by the difference in interest rates prevailing in each location when the interest rollover occurs.
In most cases, retail forex brokers automatically roll over the trades. This is done by retail brokers to prevent traders, most of whom are speculators, from having to deliver actual currency to the party on the other side of the trade. Settlement, which is the day the trader would have to deliver actual currency to the person on the opposing side of the trade, is two days after the transaction has taken place. With brokers rolling over the positions, trades can be left open without actual delivery of the full value of the currency position taking place. If the rollover did not occur, the trader would be required to deliver the face value of the currency.
Rollover interest is always paid or debited based on
A rollover is not a charge for using leverage. It is a very common misconception that if rollover is debited from a trader this is the cost of the leverage that a broker provided for this trader. The debit or credit is based on the difference between the rate of interest of the countries involved in the currency pair the trader is holding.
Credits and Debits to Trading Account
Credits or debits in interest are paid based on which currency in the currency pair the trader has purchased and whether that country's currency has a higher or lower interest rate attached with it. For example, if a trader purchases the USD/JPY pair, meaning she buys the U.S. dollar and sells the Japanese yen, and the U.S. has a higher interest rate (2%) than the JPY (0.5%), then the trader will be credited the interest rate differential - roughly 1.5% a year (unleveraged). If the trader sells the USD/JPY, meaning he sells the USD and buys the JPY, then he would be debited the interest rate differential between the two countries.
Because banks around the world are generally closed on Saturday and Sunday, the interest for these days is applied on Wednesday. This means that if a trade is left open on Wednesday and is held after 5pm Eastern Standard Time, that trade will be credited or debited for an extra two days of interest.
Brokers automatically do all of this for traders. A credit or debit will simply be shown in the account for each position that was open at 5pm EST. This could happen through a debit or credit in the trader's account, normally under a "rollover" or "roll" heading. It may also be debited or credited to a trader by way of an adjustment in the entry price.
Profiting From Rollover
Receiving rollover is an additional income stream over and above regular capital gains. For this reason, trades can be set up not only to take advantage of capital gains, but also interest income. Day traders can allow positions to stay open slightly longer to gain interest income if they are long a higher interest rate bearing currency. Also, swing traders and investors may decide to only take longer term positions in currency pairs where they can be long the higher interest rate bearing currency.
Additionally, if a trader expects that a currency pair will remain relatively flat for the year, or finish the year around current values, he or she can take advantage of the interest rate differential on the currencies and make a handsome profit if in fact the currencies do stay around the same value. If an investor goes long the EUR/JPY believing she will close the year at roughly the same value, she can make a large profit by using forex market leverage. A 2% profit due to the interest rate differential could mean a 20% return if 10:1 leverage is used. This also means the investor could lose 2% (or 20% or more if leveraged at this level or higher) just by holding the lower interest bearing currency for a year.
Summary
Rollover is interest that is debited or credited to a trader's accounts when positions are held after 5pm EST. Whether interest is credited depends on whether the trader is long the higher interest rate bearing currency. If he is, he will receive a credit; if not, he will receive a debit. Rollover is done automatically and nothing is required of the trader except to track interest separately for tax purposes. Rollover is calculated on the full value of the position and thus can provide additional profit for the trader or cause a decrease in profits or increase in losses.
Coast Dwane runs a website that provides expert opinion regarding Forex Trading with specialization in the use of Forex Traders [IvyBot, Fapturbo]. He also writes freelance articles for several Forex Trading websites.
