Depending on their trading style, forex day traders may face additional profits or expenses when holding positions open overnight.
If you are only planning on opening and closing your trades within one day, you won’t need to worry about that. However, it is still worth learning about, should you one day change your strategy or experiment with extended orders.
When you open and close a position within one day, you do not have to pay additional interest. But if you choose to hold the position open overnight, you must consider the forex rollover.
What is a rollover in forex trading?
Rollover is when the position is held open overnight. When that happens, the interest rates of the currencies in the FX pair are counted against each other. Depending on the interest rates, the trader is credited or charged a particular sum.
What is a swap in trading?
The sum the trader can gain or lose due to rollover is called a swap. A rollover may result in benefits or charges depending on the interest rate differentials. The country’s central bank sets the interest rate of each currency. Usually, the interest rates are influenced by major economic events in the country, which you can monitor in the economic calendar.
Rollover calculation
To calculate rollover benefits or charges, you can use the swap rate formula, which looks different for long and short trades.
Swap short calculation
Short trade (or bearish trade) is when you sell the currency pair with the expectation to profit from its loss in value.
Let’s say that the EURUSD is trading at 1.1000, the USD federal funds rate is 3%, and the European Central Bank’s interest rate is 3.5%. If you open a short position (sell) on the EURUSD for 1 lot, you essentially sell €100 000, borrowing it at an interest rate of 3.5%. By selling EURUSD, you’re buying USD, which earns a 3% interest rate. The interest rate differential is 0.5.
Now, let’s say your broker charges a 0.25% markup for the swap. Since the interest rate of the currency you are selling (EUR) is higher than that of the currency you’re buying (USD), you add the markup to the formula.
For this example, we use a 365-day year, but some brokers use 360 days. Depending on their trade instrument, others will use 365 days and 360 days.
In that case, the formula is:
Swap rate = (contract x [interest rate differential + broker’s mark-up] /100) x (price/number of days per year);
Swap short = (100 000 x [0.5 + 0.25] /100) x (1.1000/365);
Swap short = USD 2.26 or 2.26 points.
In this case, you are selling the EUR, and its interest rate is higher than the USD one. Therefore, 2.26 USD is deducted from your account when your EURUSD position rolls over to the next day.
Swap long calculation
Long trade (or bullish trade) is when you purchase with the expectation that the currency you bought will increase in value and you will profit from this.
By going long on the EURUSD, you’re buying EUR and selling USD. That means you would essentially be buying €100 000, which earns an interest of 3.5% using a 3% interest rate USD. If the broker charges a 0.25% markup, you will subtract it from the formula since the interest rate of the currency you are selling is lower than that of your buying currency.
In that case, the formula is:
Swap rate = (contract x [interest rate differential – broker’s mark-up] /100) x (price/number of days per year);
Swap long = (100 000 x [0.5 – 0.25] /100) x (1.1000/365);
Swap long = USD 0.75 or 0.75 points.
Here, you are buying the EUR, and its interest rate is higher than the USD’s. Therefore, the 0.75 USD is credited to your account when your EURUSD position rolls over to the next day.
