From time to time in our LIVE Daily Webinars, the question of Rollover comes up. The question essentially is what is it and how does it impact my account.
Rollover is the interest that is paid or earned for holding a position overnight…through 5 PM Eastern time.
A trader earns interest on a position when they are long the currency in the pair with the higher interest rate. A trader pays interest on a position when they are short the currency in the pair with the higher interest rate.
Take a look at the Bank Rates table below…
Let’s say that a trader bought the AUDJPY currency pair. Since they bought the pair, they bought the AUD and sold the JPY. Since the AUD has an interest rate at this writing of 4.75% and the JPY’s interest rate is 0.10%, the trader is long the currency in the pair with the higher interest rate and, as such, would earn interest on the position each day at 5 PM Eastern time.
Had the trader sold the same pair, they would then have sold the AUD and bought the JPY and therefore would be short the currency with the higher interest rate. In that event, the trader would be paying interest and it would be subtracted from their trading account each day the position was held open after 5 PM Eastern time.
A trading strategy is associated with the concept of Rollover and it is called the Carry Trade.
The Carry Trade strategy is based on the concept discussed above…being long the currency with the higher interest rate thereby earning interest each day whether or not the trade moves in your intended direction. If a trader has a longer term strategy and identifies a trending pair that is trending in the direction of the Carry (the direction they will earn interest) taking a trade in that direction can be quite powerful.
For this example let’s say the GBPAUD is trending to the downside. By selling that pair a trader would be earning the “carry” since they are shorting the GBP (0.05% interest) and buying the AUD (4.75% interest). So, if the trade continues trending to the downside, not only will the trader earn pips on the trade, they will also earn interest on their position each day. Depending on the size of the trade and the length of time the position is held, potentially there can be quite a positive impact on the trading account.
--- Written by Richard Krivo, Trading Instructor
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