What is Rollover In Forex Trading?
Rollover refers to the holding or borrowing of money. When holding currency trades overnight there is an interest payment or credit on the trade. This depends on whether the trader is a holder or borrower of a currency. A trader will either be ‘debited’ or ‘credited’ to their account for any position held at 5pm Eastern Standard Time (EST).
The debit or credit is applied for the interest portion of the transaction. It’s important to understand what is being traded in the Forex market. When trading currencies, the contract requires one currency to be exchanged for another and delivered in two business days.
If a trader buys a contract of GBP:EUR for £100 000, then the trader is essentially buying £100 000 and selling the equivalent amount of Euros.
This technically requires the trader to deliver the amount of Euros portion of the trade to the bank account of the party that they are trading with. This is then reciprocated as the party delivers the £100 000 portion of the trade into a bank account in 2 business days. However in online Forex trading, trading is simply for ‘speculation’. Traders don’t undertake physical delivery of the currency. The trading platform will automatically roll the position over to the next delivery day if held at 5pm EST. There is no ‘exchange’ made. Think of ‘speculation’ as numbers on a screen and not the actual exchange of the currency.
It is impossible to understand all the details of how Rollover is calculated on a trading platform. A calculation is made automatically using complex algorithms. What is important is to understand the markup that a broker may be adding on to these rollover rates. Rollover rates can be viewed at any time on the platform so traders know exactly what they are being credited and/or debited. If a trader buys GBP:EUR, (which means they bought GBP and sold EUR) they will earn interest on the GBP. They will also pay interest on the EUR that have been sold. When a trader sells a currency they are borrowing that currency then exchanging the borrowed currency for the equivalent amount of the currency they buy.
If a trader buys the currency with the higher rate and sells the currency with the lower interest rate then they will earn money. This is because they held the position at 5pm EST when rollover occurs and the interest rate differential is in their favour.
Conversely, if a trader sells a currency with a higher interest rate and buys a currency with a lower interest rate then they pay interest. This is because the interest rate differential this time is not in their favour.
If the position is opened and closed before 5pm then nothing happens, as no rollover is necessary. If we use a GBP:EUR trade as an example we can see the following. The overnight interest rates in the United Kingdom are currently 0.75% and overnight rates in Europe are at 0.25%. Therefore when buying GBP:EUR a trader holds GBP at an interest rate of 0.75% and has sold or borrowed Euros at 0.25% interest. In this example the interest rate differential in the traders favour by 0.50%.
If they were to sell the GBP/EUR currency pair they sell or borrow GBP at an interest rate of 0.75% and buy or hold EUR at an interest rate of 0.25%. In this this example the interest rate differential is negative by 0.50%. Therefore the trader will pay interest when holding the position at 5pm EST.
- Rollover refers to the holding or borrowing of money.
- It is a ‘debit’ or ‘credit’ for holding or borrowing currencies
- A trader will earn if the interest rate is higher on the currency they bought rather than sold.
- A trader will pay interest if the rate is lower on the currency they bought rather than sold.