In currency spot trading, rollover represents interest earned for holding a position overnight. Due to forex’s pairs trade format, every trade involves two different currencies and two different overnight interbank interest rates. Positions held “overnight,” meaning after 5 pm ET, is subject to rollover interest, either charged or applied to the trader’s account.
To understand how forex rollovers work, let’s first explain their meaning.
Define rollover
Rollovers in forex trading refer to interest earned or paid on currency positions held overnight. In terms of understanding it, traders have the opportunity to either make money or lose money.
How does forex rollover work?
Forex positions earn or pay interest based on the difference between two currencies’ interest rates. Currency rollover rates are also known as forex rollover rates. An interest rate difference between the long and short currencies will earn the position a credit. When the interest rate on the long currency is lower than that on the short currency, the position pays a debit.
For example, a long position on EUR/USD will require you to pay the difference between the EUR overnight interest rate and the USD overnight interest rate. Trading overnight requires traders to pay close attention to roll rates. Generally, FX rollover rates are stable in normal market conditions.
The rollover rates can swing dramatically daily if the interbank market becomes stressed due to increased credit risk. Carry trades, which take advantage of interest rate differentials by taking long positions in high-interest rates and shorting currencies with low-interest rates, can take advantage of favourable rollover rates.
Traders can avoid negative rolls by closing their positions before 5 pm ET, as rolls only apply to positions held open at that time. The Central Bank Calendar is an excellent resource for tracking when these events occur. Interest rate changes can cause significant fluctuations in rollover rates.
Rollover Rate (Forex) vs Swap Rate
Rollover rates are the costs associated with holding a currency pair overnight. A swap rate is a difference between the interest rates in two currencies. In currency trading, interest rates in one currency swap for an interest in another. You can also call it the swap fee or the rollover rate.
Limitations of using forex rollover rate
According to the exchange, the short-term interest rate in the respective currencies affects the difference between the investor’s calculated rollover rate and the exchange’s charges.
3 tips for using forex rollover to your advantage
To maximize FX rollover rates, traders should follow some essential tips. Incorporating rollover rates into your strategy could be made more accessible by the following three factors:
- Whenever trading cross pairs or emerging market currencies, closing positions before 5 pm ET is recommended if you anticipate a massively negative rollover rate.
- Keeping positions open is good if you expect a positive rollover rate.
- Be aware of when rollover rates may fluctuate dramatically by monitoring the central bank’s calendar.
Bottom line
A rollover in forex markets is transferring a position to the next delivery date, at which point a charge applies for the rollover. Traders can receive a rollover credit or owe a debit according to whether they have long or short positions. Forex rollover rates are the interest rates traders earn on overnight currency positions.
