Often refereed to as a forex swap or forex rollover, a rollover or a swap in forex is the interest earned or deducted for holding a position open overnight. Each currency has an interest rate associated with it, and since forex currency trading is traded in pairs (ex: EUR/USD), every currency trade involves not only two different currencies but two different interest rates as well. Invariably, both interest rates will be different and this is how “swap” or “rollover” is either gained or paid.
If the interest rate on the currency that is bought is higher than the interest rate of the currency you sold, then you will earn rollover (positive roll) and conversely, if the interest rate on the currency you bought is lower than the interest rate on the currency you sold, then you will pay rollover (negative roll). Rollover can add a significant extra cost or profit to your trade depending.
It is important for forex traders to remember that at all times that you can both gain and lose on swap and, as such, you have either positive rollover or negative rollover. There is a possibility that some instruments may have negative rollover values on both sides.
Example of a forex rollover trade
When you buy a currency pair, example the EUR/USD pair, you are buying the euro, and selling the U.S. dollar to pay for it. If the EUR interest rate is 1%, and the USD interest rate is 0.25%, you are buying the currency with the higher interest rate, and you will earn rollover, about 0.75% on an annual basis. Conversely, when you sell the EUR/USD pair, you are selling the currency with the higher interest rate, and you will pay rollover, about 0.75% on an annual basis, since you are paying the euro interest rate and earning the U.S. interest rate.
While a 1% interest rate might seem a very small amount of interest, remember that in some countries, such as Australia and New Zealand have interest rates around 6% or higher. This can make a fairly big difference. This is especially true when trading these currencies against a currency like the Japanese Yen which has an interest rate of .5%. When you factor the large amount of leverage in the forex market, and you can take that 5% return or so, leverage it 3 or 4 times and turn it into a 15 or 20% return. However, the risk with Rollovers is that the price of the currency pair that you are trading, in order to earn the carry, will/might move against you, offsetting the gain or causing greater losses than what you earn through interests.
When does a forex rollover come into play during a trade
From a trader’s perspective the rollover is a daily event that usually occurs automatically at many online forex brokers if a position is held at 5pm New York time. Any positions that are open at 5 p.m. (ET) sharp are considered to be held overnight, and are subject to rollover. A position opened at 5:01 p.m. (ET) is not subject to rollover until the next day, while a position opened at 4:59 p.m. (ET) is subject to rollover at 5 p.m. (ET) In general, such overnight positions will be credited the pips if a trader goes long on the high interest rate currency, but will be charged the pips if the trader goes short on the high interest rate currency as they are rolled from the spot value date to the next business day by their broker.
The currency pair does not affect rollover time but some forex brokers, especially if you are trading with a broker in another timezone will have a different time for rolling positions. So yes the time can vary from broker to broker. Traders must check with their respective brokers in regards to the Rollover time.
How forex Rollover works
Most banks around the world are closed on Saturdays and Sundays, therefore is no rollover on weekends, but the interest rates for those two days are still applied. To account for this, the forex market usually books three days of rollover on Wednesdays, which makes a typical Wednesday rollover three times the amount on Tuesday. This rollover swap is usually done at different rates on each date. If the rollover occurs at the historical rate of what the spot position is being held by the trader at, then the swap will generally be known as a historical rate rollover.
When trading forex if you buy the currency with the higher interest rate and sell the currency with the lower interest rate, then you earn money for holding a trade past 5pm when rollover occurs, because the interest rate differential is in your favor
Variations of rollover spreads
The forex rollover rates charged by most online forex brokers vary. Some online forex brokers offer better spreads on rollovers than others. This can have a significant impact on your bottom line if you plan on holding forex positions overnight on a regular basis. An example would be Swing traders, trend traders and carry traders. These tend to fall into the rollover category of holding positions overnight, since they generally trade over a longer-term time frame than what intra-day traders tend to focus on.
When you are long in the currency with the higher interest rate, then you earn interest for holding the position past 5PM NY time which is an advantage of forex over other markets. If you were ever to hold a long term trade, consider opening only those where you’ll get a positive swap. Some forex brokers offer a swap free or Islamic accounts. Traders can make use of this but the eligibility criteria can vary from broker to broker. In conclusion, forex rollover can be quite advantageous as you can earn extra from the interest rates applied over night.