Forex traders often talk about rollover. particularly with longer-term trades. This factor is usually included in profit and loss calculations. What exactly does it mean?

Forex Rollover Basics

In finance, rollover refers to the extension of the settlement date by holding on to a trading position by another day. This entails exiting the position at the days closing rate then reentering the same positing at the next days open rate. With that, the trader incurs the interest rate costs on the corresponding currencies he is buying or selling.

To be specific, the trader simply pays the interest rate differential between the two currencies he is trading. If he is long on a higher-yielding currency (and correspondingly short on a lower-yielding one), he will end up with a positive rollover. This means he will receive the interest differential on the position. This is also called positive carry, and is a way of earning extra profits from buying higher-yielding currencies. This kind of strategy is referred to as carry trade.

On the other hand, if he is short a higher-yielding currency (and correspondingly long on a lower-yielding one), he will end up with a negative rollover. This means he will pay the interest differential on the position.

For example, if a trader is long AUD/USD, he will incur positive rollover because Australias benchmark interest rates are higher than that of the United States. If he is short NZD/USD, he will incur negative rollover because U.S. interest rates are lower than that of New Zealand.

If a trader doesnt want to incur any rollover, especially for trades that are short higher-yielding currencies, he has to close his position by the end of the day.

Brokers typically report rollover costs at the next trading day or when the position is closed by the trader. These are reflected as credits or debits to the traders account balance, which can be viewed by looking at the account statement on the trading platform.

Take note that some brokers dont apply rollover costs on weekends or major public holidays. Rollover rates can also vary from broker to broker as it can also vary depending on liquidity in the market. These can be affected by liquidity providers such as banks, large financial institutions, and other market makers.

Forex brokers should be transparent enough to disclose the applicable rollover rates so that their clients can incorporate these in their profit and loss calculations.