Here, we'll provide you with answers to commonly asked questions about rollover, also known as overnight or swap rates.
What is Rollover?Rollover is the process of carrying an open position in the market to the next trading day. This is done automatically by most brokers, and it is usually done at a specific time, such as 5pm EST.When a trader rolls over a position, they are essentially borrowing money from their broker to keep the position open. This borrowing incurs interest, which is called the swap rate. The swap rate is calculated based on the interest rate differential between the two currencies in the currency pair.The amount of the swap fee or payment will depend on the size of the position, the interest rate differential, and the length of time the position is rolled over.A swap, also known as “rollover fee”, is charged when you keep a position open overnight. A swap is the interest rate differential between the two currencies of the pair you are trading. Swap fees are charged triple when you hold your trade from Wednesday to Thursday. Mechanics of Rollover:Interest Rate Differential: Each currency in a forex pair is associated with an interest rate set by its respective central bank. The rollover rate is determined by the difference between these interest rates.Currency Pairs: Rollover rates are specific to the currency pairs being traded. For each currency pair, the trader borrows one currency to buy another. The rollover rate accounts for the difference in interest rates between the two currencies.Long and Short Positions: When a trader holds a long (buy) position in a currency pair, they receive interest if the base currency has a higher interest rate than the quote currency. Conversely, if the base currency's interest rate is lower, the trader may need to pay interest. The opposite holds true for short (sell) positions.Why does forex rollover exist?Forex rollover is the interest paid or earned for holding a currency spot position overnight. It exists because the forex market is open 24 hours a day, 5 days a week. This means that interest rates can change during the weekend or on holidays, when banks and financial institutions are closed. Rollover helps to ensure that traders are compensated for the interest they would have earned if they had held their positions in a bank account. Disadvantages and Risks for Traders:Price Gaps: During the rollover period, when markets are closed, various events such as economic announcements, geopolitical developments, or unexpected news can occur. When the market reopens, the prices can gap significantly from where they closed. These gaps can result in substantial losses if the price moves against your position. It is to be noted that the occurrence and intensity of these price fluctuations can vary from day to day as well and that your predetermined stop loss and take profit parameters will NOT be respected.Lack of Control: Traders have limited control over their positions during market closures. For example, if a trade moves unfavorably during the rollover period, you will not have the ability to close the position or adjust your trade until the market reopens.Increased Volatility: Market open and close times tend to have higher volatility due to lower liquidity. This increased volatility can lead to wider spreads, potentially affecting the execution of your trades when the market reopens.Overnight News Risk: News and events that occur outside of trading hours can have a significant impact on the market sentiment and prices. Holding positions overnight exposes you to the risk of such news, which might result in unexpected and adverse market movements.Cost of Rollover: If you're trading in markets like forex, holding positions through rollover may subject you to swap or interest rate differentials. Depending on the direction of your trade and the interest rate differentials between the currencies involved, this could result in either a cost or a benefit.To calculate the rollover rate, you need to multiply the swap rate by the number of lots, the number of nights, and the base currency.For example, let's say you have a long position of 2 lots in the AUD/USD pair. The swap rate for AUD/USD is -4.38 AUD/lot/night. If you hold the position open for 5 nights, the rollover rate will be calculated as follows:Swap rate * number of lots * number of nights = rollover rate (-4.38 AUD/lot/night) * 2 lots * 5 nights = -43.8 AUDIn this case, the rollover rate is negative, which means you will be charged 43.8 AUD for holding the position open for 5 nights. The amount will be deducted from your trading account.The AUD/USD pair is denominated in AUD, so the rollover rate is also in AUD. However, if your trading account is denominated in a different currency, the rollover rate will be converted to that currency. For example, if your trading account is denominated in USD, the rollover rate would be converted to USD at the current exchange rate. To find swaps on Trading Platform 4/5, follow these steps:Trading Platform 4Click View in the top menu.Select Symbols.Select the currency pair you want to see the swaps for.Click Properties.The long and short swap rates will be displayed in a pop-up window.Trading Platform 5Click Symbols in the top menu.Select the currency pair you want to see the swaps for.The long and short swap rates will be displayed in a pop-up window.Please note that dividends are also applied during the rollover time of 00:01 server time on ThinkMarkets. Conclusion:Rollover is an essential aspect of forex trading that requires careful consideration by traders, especially those with longer-term strategies. By understanding how rollover rates work and factoring them into trading decisions, traders can better manage risks, optimize their trading strategies, and navigate the ever-changing forex landscape. As with any aspect of trading, staying informed and adapting to market conditions are key to success.
Forex Rollover Explained: A Guide for Traders