$$$Rollover$$$

Subject: $$$Rollover$$$ Wed Oct 29, 2014 5:19 pm

Rollover

If you are in a trade and you hold it after a certain time of day, you’ll either be charged or will receive interest, this is know as rollover. Whether you are credited interest or charged interest depends on which currency pair you are trading. Check with your broker to find out exactly what time of day they rollover positions.

As I explained previously, when you trade currency pairs you are buying one of the currencies in the pair and selling the other. Each day, your broker has to close out your trade day and open a new trade for you in order to keep your alive. This happens automatically at the end of each trading day.

If you took a long position and bought the currency in the pair that has a higher interest rate in comparison to the currency you sold, then your broker pays you interest. You might be asking why? Well this is because you effectively own the currency you bought and are borrowing the currency you are selling. Conversely if you sell the high interest currency and buy the low interest currency, then you have to pay your broker interest.

On Wednesdays brokers charge triple rollover, so watch out for that! It is important that you ask your broker exactly when and how their rollover works. You should also be aware that on some trading platforms, rollover is called “swap”.

How to Calculate Rollover

Calculating rollover sounds complicated, but it’s fairly straightforward. You need the following 3 pieces of information:

1. The exchange rate of the pair you are trading

2. The interest rates of both currencies you have traded

3. How much you have actually traded (eg lot size)

Now you’ll be able to see how rollover works while in a trade. Imagine you take a long trade in AUD/USD. This means you’ve bought AUD and sold USD. The current exchange rate is 1.0386. The interest rate of the Reserve Bank of Australia is 4% and the US Federal rate is 0.25%. In this case, you have traded one standard lot – $100,000.

You use the following equation to calculate rollover

((lot size x (interest rate of currency bought – interest rate of currency sold ))/ (number of days in the year x current exchange rate) = rollover

So for your trade you’d do the following:

(($100,000 x (0.04 – 0.0025)) / (365 x 1.0386) = rollover

(($100,000 x (0.0375)) /379.089 = rollover

3,750 / 379.089 = $9.89

So in this trade, you would make $9.89 in rollover interest swap. However if you sold AUD/USD instead, it would be a different story. Instead you would have been charged $9.89.

This may seem like a lot, but this isn’t when you consider you are trading $100,000 or one standard lot. Since one pip on a standard lot is worth $10, you have pretty much gained or lost only one pip, depending on whether you bought or sold the pair.

Hopefully, this example shows you the importance of rollover. Remember to ask your broker about their rollover rules.

It can be handy if you commonly hold trades overnight to write down the interest rates of the currencies you are most likely to trade so you know

How to Avoid Rollover

If you still find rollover confusing or you don’t want to be charged rollover, then the answer is really simple.

In order to avoid rollover you simply do not hold a trade during the time your broker initiates rollover. Also since most brokers charge triple rollover on Wednesday, they don’t charge rollover on the Thursday or the Friday. You can sometimes take advantage of this by opening a trade on Thursday and, if you need to, holding it overnight until Friday. However, you should always check how your broker applies rollover to ensure you aren’t caught out.

If you trade my free Price Action Strategy, 70% of the trades I take or on Thursday and Friday. This means that you will rarely get charged rollover.