Posted on 18/09/2013 by admin in Trading Tools

Forex Rollover Credits and Debits

If you hold a position overnight you could receive interest, or you could be debited interest.  When this happens in Forex it is called rollover interest.  It is important that you understand what this interest is and how you can profit from it.  You should also think about the tax implications of this interest.

What is Forex Rollover Interest?

Rollover interest is credited or debited to a forex trader who has an open position when 5pm EST comes around each trading day.  If you open a trade before 5pm EST and hold it until after this time it is considered an overnight trade and subject to rollover interest.  You can determine whether you will be debited or credited depending on the currency pair you are trading.

The rollover interest you stand to get is based on the total value of the trade.  This means that if you have a standard lot of one currency you are going to get interest on the cost of a lot and not the margin of the trade.  The interest is also based on the different interest rates of the countries involved in the currency pair.

Credits and Debits

The credits and debits of rollover interest relates to the currency you have bought in the pair and whether the currency has a higher interest rate than the other.  If you have the USD/NZD pair and the US dollar has a higher interest rate than the NZ dollar you will be credited the difference between the interest rates.  However, if the trader is buying the US dollar and selling the NZ dollar then they will be debited the difference in interest rates.

This can simply be put as the trader being paid interest for every day that they hold the high interest currency.  The trader will have to pay for every day they hold the low interest currency in the pair.  The interest for the weekend is generally applied to the account on the Wednesday.  If the trade is still open on the Wednesday then the trader is credited or debited two additional days interest.

The crediting and debiting of trading accounts is automatically done by the broker.  The interest is generally shown as a rollover or roll in the account breakdown.

Profiting From the Rollover

There are a lot of forex traders that use the rollover interest as a means of making money on the forex market.  There are day traders that hold positions overnight in order to get the interest.  Swing and long-term traders may use these currency pairs for trading because of the rollover interest they can get.

There are traders who buy pairs which are set to remain flat for the year.  These traders are making all their money on the interest they receive from having the pair.  Of course, you have to keep an eye on the interest rates of you are going to do this.  If the low interest rate currency changes then you may not be getting as much profit.

The Tax Considerations

When dealing with tax rollover interest is viewed in the same way that interest on a bank account is viewed.  This means that rollover income is taxed as interest income and should be kept track of differently.