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Forex RolloverWhat is Rollover?
Rollover is the interest paid or earned for holding a position overnight. Each currency has an interest rate associated with it, and because forex is traded in pairs, every trade involves not only two (2) different currencies, but their two (2) different interest rates. If the interest rate on the currency you bought is higher than the interest rate of the currency you sold, then you will earn rollover (positive roll). 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.
When you buy the EUR/USD pair, you are buying the Euro, and selling the US Dollar to pay for it. If the Euro interest rate is 4.00%, and the US rate is 2.25%, you are buying the currency with the higher interest rate, and you will earn rollover (about 1.75% on an annual basis). If you sell the EUR/USD pair, you are selling the currency with the lower interest rate, and you will pay rollover (about 1.75% on an annual basis), since you are paying the Euro interest rate and earning the US interest rate.
One of the most popular forex strategies in the the twenty-first century has been the Carry Trade. The Carry Trade takes advantage of both the differences in interest rates between countries and the high available leverage of the forex market.*
*Leverage can dramatically amplify your profits and losses. Trading foreign exchange with a high or even moderate level of leverage may not be suitable for all investors.
When is rollover booked?
5:00 PM in New York is considered the beginning and end of the forex trading day. Any positions that are open at 5:00 PM ET sharp are considered to be held overnight, and are subject to rollover. A position opened at 5:01 PM is not subject to a rollover until the next day, while a position opened at 4:59 PM is subject to a rollover at 5:00 PM.
A credit or debit for each position open at 5:00 PM appears on your account within an hour, and is applied directly to your account balance.
Weekends and Holidays
Most banks across the globe are closed on Saturdays and Sundays, so there is no rollover on these days, but most banks still apply interest for those two days. To account for that, the forex market books three (3) days of rollover on Wednesdays, which makes a typical Wednesday rollover three times (3x) the amount on Tuesday. There is no rollover on holidays, but an extra days worth of rollover is booked two (2) business days before the holiday. Typically, holiday rollover happens if any of the currencies traded has a major holiday. Therefore, Independence Day in the USA, July 4, closes American banks, and an extra day of rollover is added at 5:00 PM on July 1 for all US Dollar pairs.