Rollover rates are the interest rates charged for keeping forex trading positions open overnight. The key guiding factor in the calculation of these rates is the differences between the interest rates of the currencies involved.
Types of rollover
In forex, there are two basic forms of rollovers: rollover debit and rollover credit. As described below, they can have the following effects on a trader’s position.
We obtain rollover credit when the interest rate for the currency held long is higher than that of the one held short. In this case, the resultant credit will be equal to the difference between the two rates, and it will be deposited in the trader’s account.
In instances where the currency in the short position is larger than that of the long position, we end up with a negative balance. In that case, the resultant balance is deducted from the trading account.
In that case, we have the trader’s account gaining from a long position but also losing from the short position. Many traders often opt to leave their positions open overnight to enable them to earn from the credit instead of just waiting for the delivery of their orders.
The time element of rollover
Every day at 5 p.m. Eastern Standard Time, rollover is computed and applied to an investor’s trading account.
Forex markets remain closed on the weekends, but the rollover is still applicable nonetheless. On Wednesdays, the foreign exchange market typically books interest equal to three days of rollover.
Intraday traders do not have to worry about rollover. If a trade commences beyond 5 pm on the first day and closes before 5 pm on the next day, it will not be subjected to interest charges. If it takes a long time to execute a trade and the process goes beyond 5 pm, it will result in account credit or debit, depending on how long it’s been open. A trader’s account will be updated within an hour of the daily cut-off period of 5 p.m. EST if this occurs.
Holidays and weekends
Even when the Forex market is closed, it continues to charge and collect fees. A two-day rollover is used to calculate holiday charges if a position remains open through a holiday period.
Rollover and interest rates
The interest rate assigned to each currency in the pair is an important consideration when calculating rollover for forex trade. A country’s central bank determines and makes public its “target” interest rates only for its own currency. It is common for short-term traders to regard target rates as an approximate estimate for what the actual interest rates would be used to determine the rollover value for the individual trade.
In case the spot rate is used, instead, the rollover calculation, a predetermined number of “forward points,” is used to cater for the resultant adjustments. A forward point represents an adjustment of a single basis point change in the fx rate. They are used as a measure of the overnight interest rate volatility or changes in the interbank market rates.
How to calculate the rollover
The amount of rollover depends on the base currency and the counter currency. The base currency of the JPYUSD pair is the Japanese yen, and the US dollar is the counter currency. Let’s take an instance where a trader buys JPY and sells USD. What would happen if this trader maintained his long position through the night?
Assuming the JPY interest rate is 0.50%, and the USD interest rate is 2.5%, on an unleveraged trade, the trader’s account would be debited the 2% interest rate differential. In contrast, had the JPY interest rate been more than 2.5%, the account would have been credited with an amount equal to the resultant differential.
Forex rollover protection strategies
For overnight trading, it is crucial to consider your rollover dates. During your trading period, holidays, weekends, and other rollover days can make a considerable difference to your account balance.
You can reduce the impact of a roller in the following ways:
- There are no rollover costs if you are strictly a day trader. At 5:00 pm ET, you should avoid having negative rollovers because doing so would simply increase your losses.
- For those who know they’ll experience a favorable rollover rate (that is, a credit), they should leave their holdings open.
- Central bank rollover dates are important to keep an eye on, as they might help you predict rapid interest rate changes.
For maintaining a spot position overnight in forex, a rollover is an amount paid or gained in the form of interest. Because forex traded in pairs, every trade involves two different currencies and two different interbank interest rates. Rollover dates can help you decide when to leave your positions open and when to close them.