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Rollover is a widely used term in financial markets, especially in foreign exchange trading (FX). It is also closely associated with another important terminology called “swap”. So what are rollovers and swaps? Which roles do they play in forex trading? Answers will be detailed in this article.
What is Rollover in Forex?
A rollover is by definition the process of extending the settlement date of open positions.
Normally, when trading foreign currencies, speculators will have no ownership of those financial assets, so they will enter into CFDs (Contracts For Difference) with forex brokers. Those agreements allow investors to borrow one currency to buy another. Commonly, currency trades are conducted in the forex spot market. Thereby, the standard settlement date (also called value or due date) is two business days after the order is executed (often known as T+2). This timeframe is supposed to be adequate for both parties to satisfy all obligations of the trade.
However, investors are not interested in receiving or delivering real currencies on the settlement date. Instead, they bet on the market movement to gain profits. Therefore, they may expect the open position to be rolled over to the next business day if they think that the spot date is not a proper time to close the trade. This strategy is generally known as rollover.
Rollover is only applicable to forex trades after 10 PM GMT+0 because any open positions after this time are considered overnight. Therefore, in case traders want to avoid the unexpected risk of rollover, they have to close all positions before this time.
Assume you open a position on Monday, hence the order will be final on Wednesday. If you do not exit the trade before 10 PM, a forex broker and trading platform will automatically perform the rollover by closing the position and then reopening it on the next business day (except weekends and holidays). In other words, a brokerage company will hold your position overnight, which incurs a rollover interest rate or swap fee.
In reality, a swap fee will be displayed on trading platforms as follows:
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Swap is shown on MetaTrader 5 (Source: MQL5 Tutorial)
On the desktop version of trading platforms, most commonly MetaTrader 4 and 5, a swap is hidden from the trade and can only be uncovered when an investor right-clicks the trade, go to the Column section, and finally chooses Swap. Meanwhile, a swap fee is available on mobile versions of those platforms.
What is a Rollover Date?
A rollover date is a predetermined date on which an open position is rolled forward, thus the trade will be automatically renewed by a forex broker. Normally, every future CFD for such financial instruments as indices, commodities or crypto has a particular rollover date in a month regulated by different brokers. Meanwhile, as already mentioned, spot CFDs for forex have the expiration date, or rollover date, of T+2 for most currency pairs. In the given example, Wednesday is also the rollover date.
The Significance of Forex Rollover
Every forex transaction involves two different currencies which are closely tied to short-term lending rates issued by central banks. Accordingly, a rollover rate over a year will be the difference between the interest rates of two currencies. However, in reality, the rate will continue being divided by 365 days so that investors can know how much they have to pay for a one-day rollover.
In forex trading, investors always sell (short) one currency to buy (long) another, so every currency pair has two rollover interest rates: one for a short position and another for a long position. A trader’s account balance will be credited if the interest rate of a long currency is greater than that of a short currency. On the contrary, an amount is debited from a trader’s capital when the interest rate of a long currency is lower than the figure for a short one. In other words, a rollover rate is respectively positive and negative in the two mentioned scenarios.
For example, you open a long position of the EUR/USD pair and want to extend the value date of the trade; of which, the interest rate of the euro released by the European central bank (ECB) is 0.00%, whilst the Federal Reserve (FED) announces the rate for the US dollar of 0.25%. As you sell the US dollar to buy the euro, this means you lose 0.25% and earn 0.00% from the latter currency. Consequently, your account balance will be subject to a loss of 0.25%.
In the opposite scenario when you short the currency pair, you will earn a profit of 0.25% instead. This shows that in this case, shorting EUR/USD is more beneficial.
Therefore, those who prefer generating profits from rollover have to determine which currencies offer a high or low yield before deciding to open a long or short position. From the given analysis, it is concluded that understanding rollover in forex trading will help speculators decide whether to leave their positions open overnight to obtain benefits from rollover.
Additionally, a swap fee is not charged for intraday traders such as day traders or scalpers, but rather for longer-term speculators. That is why you need to pay no attention to rollover if you opt for day trading strategies. Even if you trade one of the major currency pairs and keep positions open for some days, any gain or loss from rollover rates can be relatively smaller than your trade’s outcome. In normal market conditions, the interest rates of major currencies tend to be stable. This implicitly indicates the economic stability of the countries because interest rates are often based on such economic indicators as consumer price index (CPI) or employment levels.
Therefore, swaps will become your concern if you hold an open position for more than 2 weeks and trade majors in times of market stress or if you trade exotics.
Factors Behind Forex Rollover Rates
There are numerous factors that affect the amounts you pay during the rollover period, including interest rates of currencies, exchange rates, types of currency pairs, the notional value of positions, and even the trading account currency.
Further, rollover rates or swap fees are also impacted by the monetary policies of central banks that may drastically change interest rates. Normally, those banks may increase or decrease interest rates to boost staggering economies or control too fast-growing economies. Interest rates of different currencies will be announced in a certain time in a year, so you should follow the Central Bank Calendar to know when interest rates dramatically vary. For example, when a credit risk arises from a borrower failing to fulfill required obligations, rollover rates will significantly fluctuate.
The Calculation of Rollover Rates in Forex
Assume you open a 100,000-unit position of longing the EUR/USD pair at the bid price of 1.21102. Currently, the interest rate of the euro (the base currency) is 0.00%, according to the European Central Bank; meanwhile, the Federal Reserve informs the US dollar rate of 0.25%. Thereby, you have to sell 121,102 dollars to buy 100,000 euros:
- The profit from buying 100,000 units of EUR is 100,000 x 0.00% = 0 EUR annually, so you also get no rollover gain;
- The loss from selling 121,102 dollars is 121,102 x 0.25% = 302.755 USD annually or 0.83 USD at rollover (equivalent to 0.69 EUR);
- Deduct amount earned from the amount paid = 0 – 0.69 EUR = -0.69 EUR or -0.83 USD (rollover loss).
This negative figure seems so small that you may not pay much attention to it. When you roll over your position from Wednesday to Thursday, you will be charged a swap fee for one day. However, in case you hold an open position right before weekends or holidays, the rollover fee would be bigger than usual. For example, if you enter a trade on Wednesday, the value date will be Friday. When you want to continue keeping it open, the settlement date will be moved forward to Monday because the retail trading market is closed over weekends. Therefore, in the given example, the rollover rate would be tripled and reach -2.49 USD.
In another scenario, you short EUR/USD at the ask price of 1.21087 with the same trade setup. In this time, you sell 100,000 EUR to buy 121,087 USD.
- The profit from buying 121,087 units of USD is 121,087 x 0.25% = 302.7175 USD annually, so you earn 302.7175 / 365 = 0.83 USD (equivalent to 0.69 EUR);
- The loss from selling 100,000 euros is 100,000 x 0.00% = 0 EUR annually;
- Deduct amount earned from the amount paid = 0.69 – 0 = 0.69 EUR or 0.83 USD (rollover gain).
This proves that when the interest rate of the base currency is lower than that of quote one, shorting the pair will help you gain earnings but longing it incurs a loss.
To conclude, rollover is the act of moving open positions from one trading day to the next business day. Meanwhile, a swap is a fee paid when positions are rolled over. Using the rollover strategy may either benefit or harm your trading account. Therefore, when you predict the rollover rate is positive or you want to continue trading, you should leave your positions open overnight. By contrast, it is better to close positions before 10 PM GMT+0 when there is any negative signal for the rollover rate. Otherwise, you may sustain a big loss.
Normally, the rollover strategy is more suitable for those who want to benefit from holding an open position overnight, especially carry traders.
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