Why trade forex
Understanding forex rollover
After learning the basic aspects of forex trading, you may want to start looking at more advanced concepts in order to create a sound strategy and improve your trading.
In this lesson, we’ll explore the concept of rollovers, how they work and how you can incorporate them into your trading strategy.
How does forex rollover work?
Each currency has an overnight interbank interest rate associated with it. And because forex is traded in pairs, every trade involves two different interest rates.
When a USD forex position is open past the American market’s closing time of 5pm (ET), your broker will close it at its current daily close rate and reenter the market on your behalf on the next trading day. This essentially means your settlement date is being extended by one day.
A settlement date or period simply means the time between when a trade is executed and the date when the position is exited and thus considered final.
This will continue until such a time as you exit the market, or your position is closed due to insufficient funds in your trading account.
When your position is rolled over, it’ll either earn or pay the difference in interest rates of the two currencies in a pair. These are referred to as forex rollover rates (rolls, for short) or swaps.
The open position will earn a credit if the long currency’s interest rate is higher than the short currencies interest rate. Likewise, it’ll pay a debit if the long currency’s interest rate is lower than the short currencies interest rate.
For example, if you hold a long position on EUR/USD and the EUR overnight interest rate is lower than the USD overnight interest rate, you’ll pay the difference. We’ll explore this with examples later on in this lesson.
If you plan on holding a trade overnight, you may want to keep a close eye on its roll rates. During normal market conditions, FX rollover rates tend to be stable. However, if the interbank market becomes stressed due to increased credit risk, it’s possible to see rollover rates swing drastically from day to day.
Some types of strategies that focus on interest rate differentials, like carry trades, seek to take advantage of positive rollover rates by taking a long position on the currency with a high interest rate and shorting the one with a low interest rate.
Remember, rolls are only applied to positions held past 5pm (ET) in US pairings. So you can avoid the risk of paying a negative roll by closing your position(s) before then.
Further, changes in interest rates can lead to big fluctuations in rollover rates, so it may be worth keeping uptodate with the central bank calendars of the markets you want to trade to monitor when these events occur.
Calculating the forex rollover rate
There are three key factors to consider when estimating the rollover rate, or nominal amount, of a currency pair:
 Your position size
 The currency pair you’re trading
 Each currency’s prevailing interest rate
Using this calculation tends to give a general view of what the rollover could be. However, the actual rollover can deviate from what you may have calculated. This is because central bank rates are usually target rates, and the rollover is a tradeable market based on market conditions that incur a spread.
Example
Let’s look at how to estimate the daily rollover cost for AUD/USD if it were trading at 0.63. Say the Australian dollar has an estimated 1.5% annual interest rate while the USD is sitting at 2.5%.
Imagine you opened a long position on the market with a minilot size, so 10,000 units of currency.
For AUD, the rollover rate would be calculated this way (because you’re long on the currency):
Step one: find the annual interest rate relative to the position size
AUD 10,000 x 1.5% = AUD 150 annually
Step two: calculate the interest your position would earn at rollover for one day
AUD 150 / 365 = AUD 0.4109 at rollover
For USD, the rollover rate would be calculated this way (because you’re short on the currency):
Step one: find the annual interest rate relative to the value of the pair
USD 6,300 x 2.5% = USD 157.50 annually
Step two: calculate the amount of interest you’ll pay at rollover (one day)
USD 157.50 / 365 = USD 0.4315
Step three: convert the interest earned in AUD to USD (the base currency)
AUD 0.41095 x 0.63 = USD 0.2589
Once you’ve calculated these amounts, you’ll then need to subtract the interest earned from the interest paid.
0.2589  0.4315 = USD 0.1726 (rollover cost)
The rollover rate estimate would simply be the long currency’s interest rate less the short currency interest rate.
In the example above, you would’ve paid a debit to hold that position open nightly.
There are forex strategies built around earning daily interest instead of paying it, referred to as carry trading strategies. Here’s an example of what it’d look like if you earned a positive roll:
Example
Say you want to buy AUD because you felt it would appreciate. In lieu of trading it against USD because you’re factoring in the interest rates, you decide to trade it against the EUR instead – so the EUR/AUD forex pair, meaning you’ll go short to buy AUD in this case.
You find that the currencies’ annual interest rates are sitting at 1.5% for AUD and 0% for EUR.
Remember, you’re buying the quote currency (AUD) and selling the base currency (EUR) when you ‘go short’ on a pair.
Say the market is priced at 1.6, and you place a minilot trade (10,000 units of currency) like in the previous example.
For AUD, the rollover rate would be calculated this way (because you’re long on the currency):
Step one: find the annual interest rate relative to the position size
10,000 x 1.6 = AUD 16,000
Step two: calculate the interest your position would earn annually
AUD 16,000 x 1.5% = AUD 240 annually
Step three: calculate the amount of interest you’ll earn at rollover (one day)
AUD 240/365 = AUD 0.65 at rollover
For EUR, the rollover rate would be calculated this way (because you’re short on the currency):
Step one: find the interest rate relative to the value of the pair
10,000 X 0% = EUR 0 annually (so, EUR 0 daily)
Step two: convert the interest earned in AUD to EUR (the base currency)
AUD 0.65/1.6 = EUR 0.41
And finally, you can then subtract the interest earned from the interest paid.
0.41  0 = EUR 0.41 (rollover gain)
In this case, you’ll earn the interest amount instead of paying it.
As you can see from this example, you’d earn an estimated €0.41 if you keep your position open overnight. This is the essence of a ‘carry trade’ strategy.
When is rollover booked?
Rollover is booked based on the central bank’s closing time in the market you’re trying to trade.
This means any positions opened just before the market’s closing time will be subject to rollover. However, if a position is opened after the central bank’s closing time – for example, at 5.01pm eastern time in US pairings – it’ll only be subject to rollover the next day at 5pm.
For US pairings: rollover happens at 5pm in America; the UK’s rollover takes place at 10pm (GMT); and in Australia, the rollover takes place at 9am (GMT+11).
How do banks account for weekends?
Most banks across the globe are closed on Saturdays and Sundays, so there’s no rollover on these days, but the banks still apply interest on weekends.
To account for that, the forex market books three days’ worth of rollover interest on Wednesdays. Using AUD/USD example above, a trader that held that trade on Wednesday at 5pm (ET) would incur a cost of USD0.1726 x 3 = USD 0.51.
How do banks account for holidays?
There’s no rollover on holidays due the market being closed, but an extra days’ worth of rollover usually occurs two business days before the holiday. Typically, holiday rollover happens if either of the currencies in the pair has a major holiday coming up.
For example, Independence Day in the USA happens every year on the 4th of July, and American banks are closed on this date. An extra day of rollover is therefore added at 5pm on July 1 for all US dollar pairs.
If the day the rollover to be applied is on a weekend, then it gets pushed to that Wednesday, which may mean 4 or 5days’ worth of interest.
How to use forex rollover to your advantage
Here are three basic tips on how you could take advantage of rolls:
 Consider closing any USD positions before 5pm (ET) if you know the rollover rate is likely to negatively impact your trade
 You could also leave your positions open if you know the rollover rate is likely to be positive and you want to continue with the trade
 It may serve you to also keep an eye on central bank calendars to monitor when rollover rates may fluctuate drastically
In the next lesson, we’ll look at ways you can use carry trade strategies when accessing the markets.
Lesson summary
 Forex trading is exchanging foreign currencies to try and make a profit from movements in their prices

1
Understanding forex rollover
15 min 
2
Using the currency carry trade strategies
10 min 
3
Types of forex analysis
10 min 
4
Trading the 24hour forex market
7 min 
5
Trading the London session
6 min 
6
Trading the New York session
6 min 
7
Trading the Tokyo session
5 min 
8
Navigating closed markets on weekends
5 min