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Rollovers in Forex
by Mark McRae
Even though the mighty US dominates many markets, most of Spot Forex is still traded through London in Great Britain. So for our next description we shall use London time. Most deals in Forex are done as Spot deals. Spot deals are nearly always due for settlement two business days later. This is referred to as the value date or delivery date. On that date the counter parties theoretically take delivery of the currency they have sold or bought.
In Spot FX the majority of the time the end of the business day is 21:59 (London time). Any positions still open at this time are automatically rolled over to the next business day, which again finishes at 21:59.
This is necessary to avoid the actual delivery of the currency. As Spot FX is predominantly speculative most of the time the traders never wish to actually take delivery of the currency. They will instruct the brokerage to always rollover their position.
Many of the brokers nowadays do this automatically and it will be in their policies and procedures. The act of rolling the currency pair over is known as tom.next, which stands for tomorrow and the next day.
Just to go over this again, your broker will automatically rollover your position unless you instruct him that you actually want delivery of the currency. Another point noting is that most leveraged accounts are unable to actually deliver the currency as there is insufficient capital there to cover the transaction.
Remember that if you are trading on margin, you have in effect got a loan from your broker for the amount you are trading. If you had a 1 lot position you broker has advanced you the $100,000 even though you did not actually have $100,000. The broker will normally charge you the interest differential between the two currencies if you rollover your position. This normally only happens if you have rolled over the position and not if you open and close the position within the same business day.
To calculate the broker's interest he will normally close your position at the end of the business day and again reopen a new position almost simultaneously. You open a 1 lot ($100,000) EUR/USD position on Monday 15th at 11:00 at an exchange rate of 0.9950.
During the day the rate fluctuates and at 22:00 the rate is 0.9975. The broker closes your position and reopens a new position with a different value date. The new position was opened at 0.9976 - a 1 pip difference. The 1 pip deference reflects the difference in interest rates between the US Dollar and the Euro.
In our example your are long Euro and short US Dollar. As the US Dollar in the example has a higher interest rate than the Euro you pay the premium of 1 pip.
Now the good news. If you had the reverse position and you were short Euros and long US Dollars you would gain the interest differential of 1 pip. If the first named currency has an overnight interest rate lower than the second currency then you will pay that interest differential if you bought that currency. If the first named currency has a higher interest rate than the second currency then you will gain the interest differential.
To simplify the above. If you are long (bought) a particular currency and that currency has a higher overnight interest rate you will gain. If you are short (sold) the currency with a higher overnight interest rate then you will lose the difference.
I would like to emphasise here that although we are going a little in-depth to explain how all this works, your broker will calculate all this for you. The purpose of this article is just to give you an overview of how the forex market works.
Good Trading
Best Regards
Mark McRae
http://www.surefire-trading.com/
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The primary factors influencing exchange rates include the balance of payments, the state of the economy, implications drawn from chart analysis as well as political and psychological factors.
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Not only is it an accessible, easy and less capital-intensive business opportunity, but it is much more cost efficient too to invest in the Forex market, in terms of both commissions and transaction fees. Generally, commissions for stock trades range from a low of $7.95-$29.95 per trade with on-line brokers to over $100 per trade with traditional brokers. Opposite to that, typically stock commissions are directly related to the level of service offered by the broker. At the high end, traditional brokers offer full access to research, analyst stock recommendations, etc. In contrast, on-line Forex brokers charge significantly lower commission and transaction fees.
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Gold is the mirror of Dollar for hedging purposes and the co-relation is excellent. Sometimes, when I am tired of double checking too many "inside infos" rushing in every hour, I just watch Gold to confirm and go ahead with the moves. Gold chart is one of the top charts you must always watch in forex trading. Eur/Gbp chart, along with the Eur/Jpy chart, is an excellent mirror for Eur/Usd directions most of the time too. Gold, Eur/Gbp and Eur/Jpy charts will tell most of the market story most of the time with Gold and Eur/Gbp leading Forex world most of the time. Good luck.
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