Rollover and Swap in Forex confuse many new traders.
Rollover is the process of moving open positions from one trading day to another.
Swap is the interest fee that you either earn or pay at the end of each trading day if you keep your trade open overnight.
Let’s now discuss rollover and swap in forex in details;
What is Rollover in Forex
As mentioned earlier, Rollover in forex is the process of moving open positions from one trading day to another.
A rollover affects only positions kept open after 5pm EST, (9pm GMT).
By rolling over position,
The trader extends the settlement period to another day.
Your broker,closes your open positions at the daily close rate and re-opens them at the new opening rate on the next trading day.
Positions you open after 5 pm of the previous day and close before 5pm of the current day are not subjected to a rollover.
However, if it goes beyond that, an interest is added or deducted on your trading account.
The interest rate used to calculate rollover is the spot rate of currency pairing and is adjusted by a specified number of forward points.
What is a Swap in Forex
Once more, swap is the interest fee that you either earn or pay at the end of each trading day if you keep your trade open overnight. .
Currency pairs may have negative swaps, positive swap or zero swap.
In case you are trading major currency pairs not exotic pairs, they normally have a zero swap because the rates of these countries are very low.
A swap rate = carry trade+rollover costs+ any commissions by the broker.
How to find the swap rate on your platform
- Go to menu display symbol
- Select the currency pair you want
- Go to properties
Or
- Right click,
- Go to symbol
- Select the currency pair then properties.
Rollover or swap rate will show the points for long or short trades.
Alternatively, if you are trading on MT4 platform, click on the terminal icon then select trade.
Carry trading can also be profitable when you use a reasonable margin and good money management.
Applicable examples with leverage.
Suppose you had a savings account in your bank of $ 5000, earning an interest of 2% per year.
And after studying and understanding Forex trading you have realized you can make much more than that if you traded forex.
And so you withdraw your money and open an account of $4000.
Your broker allows you to use a leverage worth $10,000 for your trade.
This means you will only contribute $1000 and the rest will be added by your broker.
On hearing such news you decide to take up the position that is double what you got from your bank 4%.
Woow! What happens to your account, let’s find out.
If your trade works out as predicted, you will not only earn the interest profit but also the appreciation profit.
Profit on interest will be (4%×10000)=$400.
And holding a position of $10,000, each pip movement will be equal to $1, at the end of the year your trade has moved 1000 pips that’s worth $1000.
You will realize you are yielding $1400 from $1000.
Again if the trade maintains its value and neither appreciates nor falls.
You earn only the interest rate profit which will be $400 for holding a trade.
Another way ;
If for example you take a buy on NZDUSD.
If NZD has an interest rate of 1.5% higher than the USD(0.25%) the interest rate differential will be 1.25%, as a positive carry and it will be added to your account.
Learn more about Forex swaps in this article here.
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