When you trade forex (or other CFDs), you are often faced with rollover rates, sometimes referred to as ‘overnight rates’ or ‘overnight premiums’. This is usually a cost, and sometimes an extra return. As serious forex traders you cannot ignore rollover rates. In this article we’ll explain what rollover rates are, and what to pay attention to in order to maximize your return. One of the best options to compare all the options on the internet is the new site CommodityTradeAlert.com
What are rollover rates
If you deposit money in the bank, you will receive interest on it. Nowadays not so much, but still a bit. This interest is not the same everywhere. In the Eurozone the interest rate is historically low. In the US the interest rate is slightly higher. In Argentina the interest rate is over 20% (but there inflation is also much higher). In Switzerland, on the other hand, interest rates are negative.
- Suppose you open a long EUR/USD position. This means that you buy euros and sell US dollars. So you renounce currencies with a higher interest rate, and get a currency with a lower interest rate in return. You have to pay the difference in interest. Conversely, if you go short on the EUR/USD. You then sell euros and buy U.S. dollars, which means that you receive the interest difference. These are the rollover charges, or rollover rates.
In reality, it is slightly different. Because you always trade forex through a broker, the broker finances your positions. You are only asked to keep a percentage of the trade as a margin on your account. The broker does not do this out of charity. When you hold a position, the broker charges a markup on top of the rollover rate. For example, if the interest rate differential between EUR and USD is 2% on an annual basis, and your broker charges a markup of 3.5%, a EUR/USD long position will cost you 5.5% of the amount invested annually (2+3.5%). A short position will cost you 1.5% (-2+3.5%). That seems a lot, but keep in mind that borrowing money from the bank quickly costs you 7-12% a year.
Timing and rollover moment
Forex is short-term trading. You seldom keep positions open for more than a few days, and sometimes just a few hours or less. Your profit comes from small price changes, which you amplify through leverage. This keeps the rollover costs extremely low. Most brokers do not express these costs as a percentage per year, but as a percentage per day. For example, a long position EUR/USD with Plus500 will cost you approximately 0.01% per day at the time of writing. Especially if you choose Brokers in Colombia we would advice you to check the opening times of their markets.
- In the weekend the stock exchanges are closed. Some brokers still charge an overnight rate every night. Other brokers, such as eToro and AvaTrade, charge the rollover rates of the two weekend nights at once. It would be logical if this happened on Friday at the end of trading day. But instead, the forex world has chosen to charge three days of rollover on Wednesday.
- Basically as a day trader you don’t have to pay much attention to the rollover rates. Even if you have a position open during the rollover moment, it might cost you 1 or 2 pips. Only for scalpers, who need to have trades of a few seconds with a profit of only a few pips, it’s better not to trade around the rollover time. In that case look in the forex software of your broker to see what the rollover time is.
Rollover rates for assets other than forex
Nowadays, many brokers offer various CFDs (contracts for difference). You can leverage shares, stock market indices, commodities, and cryptocurrencies. These assets do not have ‘interest rates’. Instead, the rollover rate is an interest rate that you pay to your broker to fund your position.So it costs you money to hold the contract overnight (not as much, but still). The less liquid the market, and the more risky the product, the higher the rollover rates will be.
- This is so that the broker can hedge against the risks of your position that he has financed. Equities cost more than indices per night, and indices cost more than commodities. In addition, you need to make sure that a contract is rolled over at all at the end of the trading day. This is actually always the case with forex. But some CFDs do not have a rollover, and are automatically liquidated at the end of the trading day. Other contracts such as options w