Rollover Interest in Forex

Introduction

Overnight interest is either paid or earned on all open positions at 17h00 Eastern Standard Time (EST) – which is 22h00 South African time. The time might vary between some brokers. This interest, also called rollover or swap, will either be credited or debited on the full size of the open positions and is also dependent the established margin and position in the market. Depending on the interest differential, interest will be either received or paid.

Description of mechanics

The interest fees are called rollover, because it occurs when an open position from one settlement date is rolled over into the next settlement date. Rollover transactions occur automatically if the open position is hold past the change in value date. Behind the scenes, the settlement occurs in two business days. Thus, if its Mondays before 17h00 EST currencies are trading for value on a Wednesday, so that after 17h00 EST on Monday the trade date becomes Tuesday and the trade is traded for value on a Thursday.

Trades that are opened and closed before 17h00 EST are not liable for rollover as there is no change in settlement date.

Wednesdays carries a 3 day rollover. On 17h00 EST, the value changes from Friday to Monday, a weekend rollover which means a three day rollover (Saturday / Sunday / Monday) which means the rollover costs / gains are going to be three times as much as any other day.

Why does rollover Interest Credit or Debit Occur?

Trading with currencies is trading with cash. Going long with a currency is similar to holding a deposit in a bank and interest will be earned. Going short on a currency is similar to borrowing money on which interest is to be paid. With traded currencies the relationship is more complicated. With a currency pair, a currency with a positive balance is being hold (currency going long) and a currency with a negative balance (currency going short) is being held simultaneously. The difference in the interest rate of the two countries is called the interest-rate differential.

Being credited or debited for rollover is dependent on two factors: 1) the position being hold (long or short) and 2) the interest-rate differential between the two currencies in the pair being traded.

Every currency trade involves borrowing one currency to buy another currency. Therefore is interest rollover charges part of Forex trading. Interest is being paid on the currency borrowed and interest is being earned on the currency being bought. Effectively, interest is being earned or paid depending on the direction of the trade.

Currency being bought with a higher interest rate than the one being borrowed will result in a positive net differential rate. Funds will be earned. Selling a currency with a higher interest rate than the currency being bought will result in a negative net differential, and interest will be paid for the rollover. The rollover costs/credits are based on the position size and the larger the position size, the larger the cost or gain will be.

Interest rates are not cast in concrete and are changing constantly with changing economic conditions.

Can paying swap rates be avoided?

Normally, there are three ways to avoid paying swap rates:

1.      Trade in the direction of positive interest

Trades can be entered in the direction of the currency that gives positive swap. But only focus on this when there is a history of positive results

2.      Trade only intraday and close transactions before 17h00 EST

This way swap would be avoided. This strategy should only be employed because of trading strategy and not because of swap considerations.

3.      Open a swap free Islamic Account offered by some brokers

These particular accounts are run in full compliance with Islamic beliefs and the policy of no interest to be paid upon business transactions.

Finding rollover rates on trades

Current rollover rates are available in MetaTrader 4. Find the rates from the following path:

  • Open Market Watch (Ctrl + M)
  • Click Specifications
  • Scroll down to find:
    • Swap Long; and
    • Swap Short

A positive number will indicate interest to be received. A negative number will indicate interest to be paid. If both numbers are negative means that interest rates are nearly the same.

Conclusion

Rollover swap rates are a reality when trading currencies. The trader needs to take this cost seriously to ensure that accounts stay profitable. If possible, avoid the paying of rollover fees and if rollover fees are unavoidable ensure prudent funding of accounts.