In forex, "rollover" refers to the value of accrued interest on a spot currency position during the overnight holding period. Interest rates, leverage, investment horizon and the currencies being traded are instrumental in quantifying rollover.
When Is Rollover Calculated?
In forex, rollover is calculated for application to an investor's trading account Monday through Friday at 5 p.m. Eastern Standard Time.
On weekends, the forex market is closed for business, but rollover values are still being counted. Typically, forex books an interest amount equal to three days of rollover on Wednesdays. Holidays during which the forex market is closed still provide a rollover valuation and are accounted for two business days in advance.
For intraday traders, rollover is not a concern. If a position is opened after 5 p.m. of the previous day, and closed before 5 p.m. of the current day, then no interest is paid or owed. However, if trading durations are longer than the intraday time period, and a trade is held through the 5 p.m. cut off, the trading account will be receive a credit or debit reflecting the rollover value. In the event that this occurs, the trading account will be adjusted within an hour of the daily 5 p.m. EST cut-off time.
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In forex trading, currencies are traded in pairs. The first currency in the pair is the "base" currency, and the second is known as the "counter" currency. Essentially, rollover is the difference between the interbank interest rate of the base and counter currencies.
Rollover for a specific currency pairing can be either a positive or negative value. Ultimately, the trader is responsible for the realisation of any gains or losses as result of the roll. For instance, if a trader is holding a long position in the EUR/USD at 5 p.m. EST, rollover will be the difference in the value received for holding euros and the value paid for being short U.S. dollars.
If revenue earned from interest through being long euros is greater than the cost associated with holding the offsetting US dollar short position, then the rollover is positive and the trader realises a net gain. If the interest costs are greater for holding the USD shorts, then rollover is negative, and the trader assumes the loss.
One of the key aspects of calculating rollover for a currency trade is the interest rate attributed to each currency in the pair. As a point of reference, "target" interest rates are established exclusively by a country's central bank for their domestic currency and released to the public. Target rates are widely viewed by short-term traders as ballpark estimates of the actual interest rates that will be used in determining the rollover value for a specific trade.
In practice, the interest rate factor applied to the rollover calculation is the spot rate of the currency pairing adjusted by a specified number of "forward points." Forward points represent a basis point adjustment to the exchange rate of a currency pair. They serve primarily as a reflection of the overnight or interbank interest rate markets, and they're used to account for interest rate volatility. Because currency trades take place continuously in the short-term, changes in the interbank rates are accounted for and adjusted through adding or subtracting assorted quantities of forward points from the spot exchange rate.
Revenue attributed to rollover can represent a substantial credit or debit to the trading account. Depending upon the trading strategy, nominal value associated with rollover may represent a meaningful profit or loss and directly impact the trading operation's bottom line.
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Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…