How Forex Rollover Works in Forex

Foreign Exchange Rollover Rates (Forex Rollover) refer to the interest or loss incurred when holding a currency position overnight. Each currency is associated with an overnight interbank interest rate; and because the forex market is traded in pairs, all transactions involve not only two different currencies but also two different interest rates.

Rollover refers to the interest calculated or applied to a trader’s account for positions held “overnight”, meaning after 05:00 PM ET.

Now that we understand what Rollover is, let’s explore how it works in the forex market.

1. WHAT ARE FOREIGN EXCHANGE ROLLOVER RATES? HOW ROLLOVER WORKS IN FOREX

When opening a trading position, it will either receive or pay the interest rate differential between the two currencies. This is called the Forex Rollover Rate or Currency Rollover Rate.

The position will receive the differential if the interest rate of the purchased currency is higher than that of the sold currency. Conversely, the position will have to pay the differential if the interest rate of the purchased currency is lower than that of the sold currency.

For example, let’s consider a trade buying the EUR/USD currency pair. If the overnight interest rate of EUR is lower than the overnight interest rate of USD, you will have to pay the interest rate differential.

Traders who plan to hold their positions overnight need to closely monitor the rollover rates. When the market is functioning normally, Forex rollover rates tend to be stable. However, if the interbank market becomes stressed due to increased credit risk, the rollover rates can become highly volatile.

Rollover rates apply only to positions held after 05:00 PM ET. Therefore, traders can avoid the risk of paying a loss by closing their positions before this time.

Changes in interest rates can lead to significant fluctuations in rollover rates. Hence, traders need to stay updated on central bank activities to monitor events that may impact the rates.

2. WHAT TIME DOES ROLLOVER OCCUR IN FOREX?

The rollover time in Forex is 5:00 PM ET. At FOREX.com, the rollover is processed daily at 5:00 PM ET. At that point, any open position will be carried out, and the debit or credit will be applied to your account.

3. HOW TO CALCULATE FOREIGN EXCHANGE ROLLOVER RATE

To calculate the rollover rate or nominal amount, traders need to know 3 things:

1. Position size

2. Currency pair

3. Interest rates of each currency

This calculation tends to provide a relatively accurate tool for calculating the rollover rate. However, the actual rollover rate may differ due to central bank interest rates being target rates, while rollover rates are based on market differentials.

Example of how to calculate the rollover rate (AUD/USD 0.72):

1. Position size of 10,000 lots

2. Long position on the AUD/USD pair

3. Annual interest rate of AUD is 1.5%, annual interest rate of USD is 2.5%

– Earn 10,000 AUD x 1.5% = 150 AUD annually. The rollover rate for AUD is 150/365 = 0.4109 AUD.
– Pay 7,200 USD x 2.5% = 180 USD annually, the rollover rate for USD is 180/365 = 0.4932 USD.
– Convert the earned 0.4109 AUD interest to USD: 0.4109 x 0.72 = 0.2960 USD
– Net the amount to pay = 0.2960 – 0.4932 = -0.1972 USD (loss on rollover rate)

The rollover rate is simply calculated by subtracting the buying currency interest rate from the selling currency interest rate.

In the example above, the trader will have to pay to hold the position overnight. Many forex strategies are built on this concept, called interest rate differential trading strategies. Here’s an example of a sell trade of 10,000 (EUR/AUD 1.6):

1. Position size of 10,000 lots

2. Short position on the EUR/AUD pair

3. Annual interest rate of 1.5% for AUD, with 0% interest rate for EUR

– Earn 10,000 x 1.6 x 1.5% = 240 AUD annually, the rollover rate for AUD is 240/365 = 0.65 AUD.
– Pay 10,000 x 0% = 0 EUR
– Convert the 0.65 AUD interest earned to EUR: 0.65/1.6 = 0.41 EUR
– Net the amount earned and amount paid = 0.41 – 0 = 0.41 EUR (profit from rollover rate differential)

4. WHEN DOES THE FOREIGN EXCHANGE ROLLOVER RATE APPLY?

The rollover rate applies at 05:00 PM ET. A position opened at 04:59 PM will be subject to the rollover rate at 05:00 PM. A position opened at 05:01 PM will only be subject to the rollover rate if held until 05:00 PM the following day.

• If you are in the USA, the rollover rate applies at 05:00 PM.

• If you are in the UK, the rollover rate applies at 10:00 PM (GMT).

• If you are in Australia, the rollover rate applies at 09:00 AM.

4.1. How Banks Handle Rollover at the Weekend

Most banks worldwide are closed on Saturdays and Sundays. Therefore, there will be no rollover rates on these days; however, banks will still apply interest rates. To explain, on Wednesdays, the Forex market records a 3-day rollover. Using the AUD/USD example above, a trader holding a position at 05:00 PM will incur a cost of 0.1972 x 3 = 0.59 USD.

4.2. How Banks Handle Rollover on Holidays

No rollover rates occur on holidays. However, the rollover rate will be adjusted for the two working days before the holiday.

Typically, holiday rollover rates occur if one of the currencies in the pair has a major public holiday. For example, on the US Independence Day (July 4th), when US banks are closed, the rollover rate will be calculated for an extra day at 05:00 PM on June 1st for all pairs involving USD. If the holiday falls on a weekend, the calculation is moved to Wednesday, meaning interest will be calculated for 4 or 5 days.

5. NOTES ON TAKING ADVANTAGE OF THE FOREX ROLLOVER RATE

Here are some tips to help traders benefit from the Forex rollover rate. Below are three things that can help you incorporate rollover rates into your strategy:

1. Close positions before 05:00 PM ET if you predict the rollover rate might be negative. This can occur when trading cross-currency pairs or currencies from emerging markets.

2. Keep positions open if you expect the rollover rate to be positive and if you want to continue trading.

3. Pay attention to central bank movements. This will help you recognize when the rollover rate might fluctuate significantly.

6. 3 WAYS TO AVOID PAYING THE ROLLOVER RATE

Here are at least 3 ways you can avoid paying the rollover rate:

• Trade in the direction of a positive rollover: You can only trade in the direction of the currency likely to have a positive rollover. This is generally not recommended unless you are trading based on a specific strategy that has been tested for both reverse and forward tests.

• Day trading and closing before 10 PM GMT (or your broker’s rollover time): This will help you avoid rollover fees by entering and exiting before the rollover time. However, day trading solely because of the rollover is illogical. The only reason you might become a day trader depends on your strategy and not because of rollover fees.

• Open a Rollover-Free Account, which some brokers offer.

7. HOW TO PROFIT FROM ROLLOVER?

The most common way to profit from high rollover rates is through carry trading. This involves buying a currency with a high-interest rate while selling a currency with a low-interest rate. The broker will pay you to keep this position open overnight.