For most traders, overnight rollovers are not that high on their priority when it comes to choosing a forex broker. While it is only but obvious that spreads tend to be of utmost concern to the trader, by the time a trader comes around to trading and realizing that they are being charged negative rollover rates, its a bit too late.
This article reinforces the fact that traders should pay attention to overnight rollover rates just as much as attention they give towards spreads and other important items on their checklist when choosing a forex broker. Of course, if your trading style is purely intra-day with no open positions over night, you can just skip this aspect completely.
What is a Rollover or overnight interest in Forex
But before we go ahead, let’s first address the basic concept of swaps or rollovers in forex.
A Forex rollover is a credit or a debit charged by your forex broker for any trade positions that are kept open overnight. This credit/debit is often referred to as rollover interest or overnight interest rates. The time period to calculate the rollovers is 5PM EST. Meaning that any positions that are kept open at 5PM EST attract a rollover charge. This is done because traders are speculators and thus in order to prevent the physical delivery of the currency, the positions are closed, opened and a rollover interest is applied.
How are rollover rates determined
As a general practice, rollovers are determined based on the currency’s prevailing interest rates. For example, if you had an open BUY position in AUDUSD, then in effect a Long order would attract a positive rollover.
Why? Because if you consider the interest rates for Australia, which is at 2.75% (latest) and the interest rates for the US Dollar, which is at 0.25%, you can clearly see that a long AUDUSD infers to buying the Aussie dollar and selling the US Dollar, you are in effect buying currency which has a higher interest rate.
On the contrary when you buy currency with lower interest rate and sell currency with higher interest rates, your open trade positions would attract negative overnight rollover charges.
Forex Rollovers tend to fluctuate depending on a currency’s monetary policy. While central banks do not frequently change interest rates, it is always advised to keep an ear out, especially during the beginning of every month regarding any potential interest rate changes.
In most cases however, Central Banks tend to give out feelers at least a month in advance. If the interest rates are changed, be sure to contact your broker to find out about the new rollover interest that would be charged.
Rollover Exceptions – Sharia/Islamic Accounts
The exception to the rollover rule is for Islamic accounts, also known as No-Riba accounts. Such trading accounts are no-interest accounts and are done to comply with Islamic laws. If you think you can take the route of opening an Islamic account to avoid overnight rolling interest, then be sure to justify the same.
3-Day Rollover Wednesdays
For traders who are used to trading higher time frame charts, Wednesday is the day to watch out as your open positions are charged 3 times the rollover. This is because of the weekend (Saturday/Sunday) where no overnight rollovers are levied. In other words, if you had an open position at 5PM EST on a Friday, then come Monday, your open position would be charged rollover as if it was for only one day. In order to circumvent this discrepancy, Wednesdays attract the day’s rollover and two times more to make up for the weekends.
Why should you bother about rollovers?
As mentioned in the beginning of this article, for pure intra-day traders, rollovers are of no significance, and even if such traders keep their positions open in rare cases, it doesn’t really matter.
On the other hand, traders who play out a long term trading strategy cannot ignore rollovers and this is even more important for those trading with commission only brokers. A negative rollover on top of your commission can eat up into your profits.
While rollovers can be annoying (especially when they are negative) when used with a trading strategy, rollovers can actually help you cover your broker’s commissions. Even if you want to keep your trade open for just one night, look for Wednesdays as a positive rollover can at the very least cover at least 50% of your broker’s commissions. Sure, its only a few cents to a couple of dollars, but every small reduction in fees can help your equity.
Do all forex brokers charge the same rollover fees?
Fortunately or unfortunately not. Which is why traders should pay attention to this fact. You cannot blindly keep a position open overnight simply because the bid currency’s interest rate is higher than the quote currency’s interest rate. Therefore it is essential to check with your broker regarding the rollovers. You can find the rollover information with most brokers on their website and these details are generally found under ‘Trading Conditions‘ sections. While it is not entirely clear as to why some brokers charge negative rollovers for a pair that should essentially attract positive rollovers, we have learnt that in most cases, the brokers tend to point fingers to their liquidity providers. If such is the case, especially with a broker that charges only commission, then it needs to be investigated further.