What Is Rollover?
Rollover refers to the process of extending the settlement date of an open position in the forex market or other financial instruments. In forex trading, it involves holding a position overnight and applying an interest adjustment based on the difference in interest rates between the two currencies in the pair. This interest—positive or negative—is known as the rollover rate or swap fee.
Key Takeaways
- Rollover occurs when a trader keeps a position open past the market’s daily close.
- It results in an interest credit or debit based on the interest rate differential between the two currencies in a pair.
- Rollover can be positive (earning interest) or negative (paying interest), depending on the position and interest rates.
- It typically happens at 5:00 PM EST, marking the end of the trading day in forex markets.
- Rollover is important for traders holding positions for longer than one day, especially in carry trading strategies.
How Rollover Works
In forex, each currency in a pair has an associated interest rate set by its central bank. When a trader holds a position overnight, they are essentially borrowing one currency to buy another, incurring a cost or earning interest based on the rate differential.
- If you are long a currency with a higher interest rate than the one you're shorting, you may earn interest.
- If you're long a lower-yielding currency, you'll typically pay interest.
Rollover is automatically applied by brokers at the daily rollover time. Some brokers display this fee as a separate line item; others include it in the position’s profit/loss.
Examples of Rollover
- EUR/USD Position: If you hold a long EUR/USD position overnight and the euro's interest rate is higher than the U.S. dollar's, you might receive a small credit. If the opposite is true, you may be charged.
- Carry Trade: A trader goes long on AUD/JPY to benefit from Australia's higher interest rate compared to Japan's lower rate, collecting rollover interest daily.
- Weekend Rollover: Positions held on Wednesday are charged triple rollover to account for the weekend when markets are closed.
Benefits of Rollover
- Passive Income: Traders in favorable interest rate scenarios can earn rollover as passive income.
- Key to Carry Trades: Essential for strategies that profit from interest rate differentials.
- Market Efficiency: Reflects real-world borrowing and lending costs in global markets.
- Automated Adjustment: Handled automatically by brokers, simplifying the trading process.
Costs and Limitations
- Rollover Charges: Can accumulate and reduce profits for trades held long-term.
- Variable Rates: Rollover rates are not fixed and can change daily based on market conditions and broker policies.
- Not Suitable for Scalping: Short-term traders generally close positions before rollover to avoid these fees.
- Triple Swaps: Can be significant mid-week due to weekend compensation.
Who Uses Rollover?
- Forex Traders: Anyone trading currencies and holding positions overnight is subject to rollover.
- Carry Traders: Strategically use rollover to benefit from positive interest differentials.
- Investors in Derivatives: Rollover also applies when extending contracts (like futures) beyond their expiration.
- Institutional Traders: Often manage large portfolios where rollover impact can be substantial.