What Is Rollover Interest In The Forex Market?

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What Is Rollover Interest In The Forex Market

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Forex Market

Rollover Interest

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In the Forex market, mostly trading is done as spot trading which means the deals are to be settled after 2 days. This is referred to as the value date or delivery date. As spot trading is usually speculative, the traders do not wish to actually take delivery of the actual currency. They tell the broker to always rollover their position. Many of the brokers nowadays do this automatically. When there is overnight holding of trade positions the forex broker will close all positions at the end of the trading day that is at 5pm EST and open new positions. The forex traders will then credit the account according to the difference between the inter-bank interest rate of the currencies and the trading. The act of rolling the currency pair over is known as tom. Next which, stands for tomorrow and the next day.

Forex rollover fee is credited to the traders account if the countries currency he buys has greater interest than that of the pair, and vice versa. If the trader sells the currency which has a higher interest rate, then the rollover fee is deducted from his account, and vice versa. The fee is calculated according to the trader’s entire trading position and not his actual traded amount. Thus the effect of rollover fee is multiplied with marginal trading. There will be increased rollover fee for trades On Wednesday as they are settled after 4 days on Monday.

If you are long the currency bearing the higher interest rate then you should earn interest, automatically credited to your trading account.  Conversely, if you are short the currency bearing the higher interest rate, then it will be debited to your account.

Rollover interest charges are an inherent part of Forex trading, since every currency trade involves borrowing one currency to buy another, Interest is paid on the currency that is borrowed, and earned on the one that is purchased. If a client is buying a currency with a higher interest rate than the one he/she is borrowing, the net difference will be positive and the client will earn profit as a result.