Rollover is the name given to a certain situation in forex. There is a time when the market closes- 5pm EST. A new day begins in New Zealand, but the prior day is over. If a foreign exchange position is still open at this cut off time, it means there is a rollover. For the broker it is time to assess whether you are paid or paying interest on the position and margin being used for the open trade. Foreign exchange trading is usually considered difficult because of rollovers and leverage. It is easy to see why when you consider such things as paying or earning interest on a position you did not close.
How Foreign Exchange Trading Rollover Works
Currency trading always involves “borrowing” one currency in order to borrow a second. You pay interest on any currency borrowed for the transaction and earn on the currency you bought. The reason borrow is used in foreign exchange trading is leverage. You have used leverage to open a larger position than you have in your account. You have a margin balance in your account that is covering for losses or gains the trade might incur.
Essentially, the broker has given you money to use in the transaction to buy a different currency. You can close your position before the 5pm EST time and avoid rollover altogether.
If you leave your position open then you have to worry about the interest rates on currency. There is an interest rate differential or IRD. If the calculation is positive you earn money for the open position. If it is negative then you pay interest for the foreign exchange trading you conducted.
Retail brokers set the rollover rates they charge through a number of different variables like interbank rates and account leverage amounts. Your broker is going to be the one to deal with the rollover rates charged or paid. You will see them if you click on your account history since your open position will show various debts and credits. Some dealers instead of making money from rollovers will close out your position before the cut off time. They will then reopen it seconds later with the new day. It is certainly something you need to find out from your dealer to ensure your account is in proper order.
Foreign Exchange Trading without Rollover
For beginners it is often best to ignore rollovers and close out your position for the day. Foreign exchange trading for more than a day can provide significant losses. The USD is a good example. It was on a four day gain from Friday September 20 to early Wednesday morning. Starting Wednesday it started to lose its gains against several currencies including the AUD and EUR. If a trader held it from Tuesday to Wednesday they may have lost money instead of gaining profit. By closing out each night and reassessing the market the next day there is potential to make more money since you would be in the right position.
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