In this lesson we are going cover Rollover. We will start by explaining the concept of rollover then go into an example of how it is calculated. We will show you how to take advantage of rollover, as many successful traders make it an integral part of their trading strategy. Rollover is the interest paid or earned for holding a position overnight. Here is an example: As we covered in reading a forex quote, any time you take an FX position you are buying one currency and selling in the other.
Your position will therefore earn the interest rate of the currency that you have bought, and you will owe the interest rate of the currency that you sold. The net difference will either be credited to your account or debited from your account every day at rollover, which is 5pm Eastern US Time.
If you close a trade before the rollover time, or open it after the rollover time, no interest will be paid or owed. This comes out to AUD per year. For this side of the trade, we owe 0. To do that we simply multiply by 0. Now, log into your trading platform and see what the roll amount is. The reason is that the interest rates that we used in our example: So, unfortunately, our calculation and this example here is just to help understand rollover conceptually. Doing the calculation based on target rates will never get you to the exact rollover value that is charged or earned, but it is a good exercise to understand how rollover works.
The answer is that banks introduce a spread on the interest rates. They will pay us a bit less than the overnight rate when we lend to them, and they will charge us a bit more then than the overnight rate we you borrow from them.
The end result is that, unfortunately, we traders always get charged more then we earn when it comes to rollover. This is also why both rolls can both be negative at times. Some traders will only go into positions that will allow them to earn at rollover. The spot rate itself will of course fluctuate, and that can work for or against us.
Also, interest rates often change and the amount that you earn or owe each day will therefore change as well. So if you are going to be a carry trader, be sure to stay on top of interest rate movements and sentiment. An important thing to note is Wednesday Rollover.
FX is generally a two-day deliverable market. That means that positions will settle 2 days from when they are opened. Wednesday at 5pm, positions get rolled over to Thursday positions. These positions would technically settle on Saturday. Banks are closed on Saturday, so instead they are rolled through the weekend to Monday.
So the short of it, is that Wednesday rollover is typically 3 days worth of interest. There is no rollover applied to positions that are held open on Saturday and Sunday. Holidays can also affect the rollover schedule. You can easily reference the special holidays and how they affect rollover on our regularly updated Rollover Calendar. So that covers rollover and how it is calculated. Hopefully you now understand a bit about how to take advantage of it as well.
Rollover and the Carry Trade 47 of Finding the Right Trade Size for You. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. Click here to dismiss. Foundations of Technical Analysis: Classic Chart Patterns, Part I. Upcoming Events Economic Event.
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