Why is Understanding Forex Rollover Important to My Trading Profitability?
Learning how to take advantage of forex rollover has the potential to give you an amount of income above and beyond the regular capital gains you can earn. In addition, if you believe that currency prices will remain flat for a particular period, you can still make a profit by taking advantage of rollover. Many traders, however, may not be aware of rollover and so are effectively leaving money on the table when they trade. Here is a short overview of what this strategy is and how you can make money from it.
Forex Rollover Basic Concepts
Whenever you buy a particular currency pair, each currency has a particular interest rate associated with it. To illustrate, if you are buying the EUR/USD currency pair, the euro may have an interest rate of 1% and the dollar, 0.25 percent. Therefore, if you are buying this currency pair, you are earning around 0.75% interest rate annually since you are buying the euro and selling the dollar. If you are selling, on the other hand, you will have to pay 0.75% interest rate. However, you will only earn rollover if you keep your position open overnight. Effectively, for instance, if you are still holding an open position at the end of the trading day, you have booked rollover.
One of the common misconceptions that forex traders who are not aware of forex rollover have is that rollover is a charge debited from a trader’s account for using leverage. Another thing to remember is that it is debited based on the total value of your trade and not just the margin you used for trading. For example, if you put up a margin of $10,000 to buy a single lot of EUR/USD, you will be paid or debited rollover based on the full value of the lot, $100,000 and not the $10,000.
Profiting from Forex Rollover
Since the rollover is automatically debited or credited into a trader’s account without them having to request it or do anything else, many of them take it for granted. If you look at your account statement, you can find this amount under the heading “rollover” or “roll” or may be debited or credited as an adjustment to the entry price.
The most common way you can earn more from it is simply to hold your position open longer. The settlement date for currency trades is two days after the trader made the transaction; by rolling over the transaction, however, the trader can keep his position open for longer than this and make more money, since it will be debited or credited for every day the position remains open.
To maximize your earnings from rollover, you will also have to keep track of interest rates, which are listed on forex quotes or on the dealing rates windows of trading platforms as Roll S or Roll B, with Roll S being the amount of forex rollover you earn or pay if you sell to get into a trade and Roll B the amount you will be debited or credited if you buy to enter a trade.
« Forex Rollover Broker Fees May Eat Into Your Profitability Dealing with Forex Slippage »
