09 FOREX Swap Rollover Interest

So What is Forex Swap Rollover Interest and can I profit from it? Yes you can, learn how!

Forex Interest

As we discussed earlier, that if you hold your positions past 5pm EST there would be a rollover. What we did not previously discuss was that it can also generate you an additional income (or loss) from the difference (Swap) in the 2 currencies interest rates.

Since forex is traded in pairs, every trade involves not only two different currencies, but also their two different overnight interest rates.

Everyday at 5pm EST your broker will rollover any open positions you have into their new 2 day contract.

And at the same time they will calculate the difference in the interest rates.

FOREX Swap Rollover Interest

From all your long and short positions and either pay you, or charge you the difference.

These overnight interest rates are charged / paid 7 days a week. On Wednesday instead of just calculating the 1 day interest difference, they calculate it for 3 days, Sat, Sun and Mon. Because we are trading 2 day contracts, Monday is paid on Wednesday, 2 days behind. So you will always see 3 times the normal interest paid or charged on Wednesdays.

This is the same also if there is some bank holiday affecting 1 of the currencies. Yes the currency can still be traded, but the interest charged or paid will be added onto the next available day.

GLS Equity Forex Interest Wednesday Tripler

Forex Rollover

If the interest rate of the currency a trader bought is higher than the interest rate of the currency a trader sold, then the trader will earn interest or “rollover” (positive roll).

If the interest rate on the currency the trader bought is lower than the interest rate on the currency you sold, then the trader will pay rollover (negative roll).

GLS Equity Forex Rollover

And it is also possible that both rollover for buying and selling the same pair are negative. Both the banks and your broker will charge a small spread on the interest paid or earned. So this spread can turn a small positive roll into a small negative roll…

What is the Carry Trade?

The cost of maintaining an investment position is often referred to as the cost of carry or carrying charge. It can come in many forms, including interest on margins or the loans used to make the trade, or the cost of storage and insurance associated with holding a commodity or many other similar items.

In the FX market the net interest difference is also known as the carry

GLS Equity Forex Cary Trade

Traders looking to “earn carry” will buy a high-yielding currency while simultaneously selling a low yielding currency.

So, assuming the exchange rate remains constant, an investor is able to earn the difference in interest between the two currencies. And this is paid daily at 5pm EST. And remember in FX we are trading using leverage. Using 400:1 leverage we can potentially earn the interest off of $100,000 by only using $250 of our own…

The foreign exchange carry trade has a successful track record that goes back more than 25 years. However, the recent shift in the world’s financial markets towards lower interest rates and higher risk aversion makes it more difficult to make successful carry trades.

But it can still work if you are careful, especially on Wednesdays : )


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