What Is Rollover In Forex?

By Steven Hatzakis Wednesday, January 17, 2018

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Every trader wants to be on the positive side of the rollover. But how many really understand rollover in Forex? That’s why we have this post for you!

Introduction

The Forex game is all about the profit and getting as many pips as possible, so grasping the term rollover may make a huge difference in your trades.

If you can figure out how to take full advantage of rollover interest, then you are most likely able to earn some extra funds from the Forex market
But before that, you must fully understand what rollover in Forex is and how to use it.

What Is Rollover in Forex?

The interest paid or earned to hold a currency trading position overnight is called the rollover. There is an overnight interest rate for every currency, and each currency pair involves not only two types of currency but also two different interest rates when trading currency pairs in the Forex market.
The difference between earn rollover and pay rollover
In contrast to popular belief, central bank rates are not the determining factor for foreign exchange rolls. Instead, rollovers in Forex are structures with forwarding points based on overnight interest rates when banks borrow unsecured amounts from each other.

How Does Rollover Work?

Over-the-counter is how the Forex rolls work after all. You should settle and roll forward market and spot trades every day. If the interest rate of the selling currency is lower than the buying currency, you would have a positive roll. Otherwise, if the buying currency is lower than the selling currency, then you would have to rollover.

Rollover, also commonly known as tomorrow next, is convenient and effective since most traders would not think of receiving the currency they buy. Instead, their goal is to benefit from many shifts in the exchange rates.
When you may pay and receive rollover financing
It’s normal to pay and receive interest since most transactions occur by borrowing currencies between different countries with different currencies. A trader with long position in a higher valued currency than the borrowed currency will obtain some interest in his or her account.

On the other hand, if the currency he or she borrowed have a higher interest rate than the currency bought then he or she would have to pay interest. You should close your trade position by 5 pm Eastern Standard Time if you do not want to receive or pay interest.

When Is Rollover in Forex Calculated?

In the Forex market, 5 pm in New York marks the start and end of a trading day. Positions are exposed to rollover and will be held overnight considering that they are opened at exactly 5 pm. However, any position opened after 5 pm is not exposed to rollover until the following day.

Rollover in an investor’s account is calculated on weekdays at 5 pm EST. The Forex market is closed for business on weekends, but rollovers are still taken into account within two days. The Forex will book an interest of three day’s worth of rollover on Wednesdays. You will not have to pay any interest if a position is opened after 5 pm and closed before 5 pm on the next day.

Rollover for a certain currency pair can be positive or negative. Any gains or losses from the roll will all be held responsible for the trader. Rollover can be seen as the difference between the interest rate of the base and counter currencies in a currency pair. If a trader holds a long position in the USD/JPY at 5 pm EST, for example, the difference in the amount gained from holding US dollars and the amount paid for being short Japanese yens will be the rollover.

Why Are Most Rollovers Low?

Central banks all over the world have made plans to increase the liquidity and balance financial markets for the last two years, including the considerable minimization on overnight lending rates and large infusion of capital into the Forex system.

After recovering the system, banks can exchange money between themselves with cheaper fees, but this also means that the amount of overnight interest earned or paid would be majorly lower. This also leads to negative rolls for selling and buying currencies since banks and other markets participants charge some spread on the interest earned or paid.

Profiting from Rollover Interest

On how to profit from rollover interest, let’s take a look at the USD/JPY pair for example. Assuming that the interest rate for the US dollar is 5% and 2% for the Japanese yen. You believe the USD/JPY pair will move higher when you buy the US dollar; then you will earn a rollover interest of 6% and pay a 2% interest for borrowing the Japanese yen. Overall, you would get a 4% rollover interest.

Every trader would always want to be on the positive side of the rollover, leading to a trading strategy that is common in the Forex market – the Carry Trade. This method takes advantage of different interest rates of different currencies in different countries and profit from the rollover.

Conclusion

With the World Wide Web and Internet of Things nowadays, it is best to use it to its full advantage in order to access global markets, analyze data and learn from experience. With a bigger outlook on the Forex market, you are one step closer to becoming to professional trader.

Hopefully, this post gives you helpful information about rollover in Forex. Leave your comment below if you have any questions to ask us. Thank you for reading!
See More:
  1. What Is Leverage In Forex?
  2. What Is A Pip In Forex?
  3. What Are Major Forex Currency Pairs?
  4. Forex Capital – How Much Do You Need To Start Trading?
  5. What Is Forex? And What Is It Pros And Cons?