Forex Rollover Interest – An Introduction
In Forex trading programs, all Forex transactions should be settled in 2 business days. This means, if someone opens a position for a trade on Monday, the trader should settle the trade by Wednesday, at the same clock time. If someone wants to keep their position or trading going without having to settle them, then they should close their positions by 5PM EST and reopen the positions again in the next day. This technique delays the settlement in another 2 business days. This process is what we call ‘rollover’ and it comes to the trader with a gain or a loss.
Let’s see how rollover comes either with a gain or a loss.
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When you trade in the Forex market, you basically borrow (by spending) a currency (base currency) in order to purchase another currency. By 5PM EST every day, you are charged an interest for the money you borrowed and you are paid an interest for the money you purchased. As an example, if you spend USD to buy JPY, you are charged an interest for USD based on the interest rates defined in the USA and you are paid an interest for JPY you bought as defined in Japan for their currency. Since the US interest rates are higher than the interest rates in Japan, your interest gain will be a negative value. In this rollover, you lose money overnight. In case if your base currency was JPY, you will be earning the interest difference between the two currencies as rollover interest.
The rollover interest is an automatic process where the earned interest is paid automatically to the trader’s Forex account overnight, assuming the trader has bought a currency with higher interest rate. If the currency bought has a lower interest rate compared to the base currency, then trader’s account will be charged for the interest difference overnight.
In case if you have bought a significant volume of a currency that has much lower interest rate compared to the base currency, you may end up losing a significant amount of money as rollover interest. The best alternative for this situation is to settle the positions without closing them. Although this could be a solution, one should also evaluate the gain from settling the positions versus rollover interest loss. If the currency is performing well in the market, you may want to bear the rollover interest cost and close the trade in order to open it the next day.