Each currency has an interest rate attached to it, and the difference in interest rates for each currency pair you hold could result in a debit or credit being applied to your account each night. Rollover (or swap) is a way to increase profits or reduce losses, or being on the wrong side of it can cut into profits or add to losses.
What Is Forex Rollover or Swap
Retail forex brokers apply something called rollover or swap to all trades you are holding at 5 PM EST each night. Therefore, rollover rates only matter to traders who hold positions overnight, and rollover isn’t of concern to day traders. Assume that during the day you bought a standard lot (a standard lot is $100,000 worth or currency) of the NZDUSD, and at 5 PM you are still holding that position. When you buy a currency pair, you are buying the first currency listed in the pair and selling the second. Both of these currencies in the pair have an interest rate attached to them, and the difference in interest rates determines whether you will be debited or credited rollover.
Assume that at the time of purchase the interest rate in New Zealand is 4% and interest rate in the US is 1.5%. The NZD rate is higher. Since you own the NZD, you are credited the interest rate differential, which is 4% minus 1.5%, or 2.5%. That is a yearly rate, meaning that if you held the position for a year you make 2.5% on the position from interest alone. If the position is a standard lot, or $100,000, you make $2,500 if you hold the position for a year and do nothing. Unfortunately, it isn’t quite that easy. The price of a currency pair can fluctuate by 20% or more in a year, so trading only for interest typically isn’t advised, because you could lose a lot more than 2.5% if the NZD starts falling against the USD.
Rollover credit and debits are based on the entire amount of your position, which means that if you are using leverage these seeming small payments can add up to a significant amount of money. In the example above, the trader is receiving $2,500 if they hold their $100,000 (standard lot) position for one year. But the trader isn’t required to put up all the capital for that trade. They may only have $20,000 in their account, and are using leverage to finance the rest of the position. In this case, the $2,500 in interest alone represents a more than 10% return on account capital.
That said, if you can get positive rollover (referred to as “positive roll”) and are taking trades where the currency you are buying is expected to rise, you benefit in two ways.
If you had sold the NZDUSD in the scenario above, you sold the higher interest currency and bought the lower interest currency. This will result in a debit being applied to your account each night you hold the position.
Current interest rates are for each major country (and thus currency) are provided on the Daily Forex Stats page. For a list of interest rates for all countries, see TradingEconomics. The posted rate from both these resources is the rate published by the Central Bank in that country. Rollover rates aren’t necessarily based on these numbers, although they will give a very good estimate. Rollover rates are based on overnight lending rates that banks can get. Differences in rates from day to day may affect rollover credit/debit amounts, even though the Central Bank rate doesn’t change that often.
As a rule of thumb, if you buy a higher interest rate currency (relative to the other currency in the pair) based on the interest rates published in the above resources, you will likely receive a credit. If you buy the lower interest rate currency, expect a debit. The bigger the interest rate differential the bigger the credit/debit.
The interest rate differential is paid out daily, for example, 2.5% divided by 365 days (as a rough estimate). But since brokers and the forex market is closed on the weekend, credit or debits are not applied on Saturday or Sunday. Instead, Wednesday is a triple day. If you are holding a position at 5 PM EST on Wednesday, you will be subject to three times the typical credit or debit, which makes up for the weekend.
There is a formula for working out how much your debit or credit will be each night, but in the real world the calculation is virtually useless because every broker will credit or debit you a different amount. Here is the formula: [dollar quantity purchased X (first currency interest rate – second currency interest rate)] / (365 x exchange rate). For our example above, the formula would look like this: [$100,000 X (0.04 – 0.015)] / (365 x 0.7201) = 2500 / 265.83 = $9.4.
Brokers and Rollover
Forex brokers make money from spreads, commissions, fees and quite often from rollover. Brokers set their own rollover numbers, which means if you are expecting a credit they may shave a bit off for themselves. And if you are being debited, they may tack on a bit extra for themselves. This is all factored into the rollover numbers they publish.
Myfxbook has a comparison tool for swap rates. The list below shows several brokers and what they are crediting/debiting for rollover. The chart shows how many pips (not dollars) are being credited or debited. The comparison shows the wide array of rollover rates being offered. Just as a trader will want to find a broker that offers competitive spreads and/or commissions a trader will also want to find a broker that pays competitive rollover rates.
The chart above shows rollover rates for a snapshot in time of four different currency pairs. When considering the best rollover rates, or whether your broker is competitive, consider both the long and short rates, not just the side you are currently on. When looking at the EURUSD, Berndale Capital and Tickmill have the best rates on this chart (not an endorsement). They offer one of the highest rates for being long, and you don’t lose as much for being short compared to some other brokers. Remember though, this is just a snapshot and rollover rates are subject to change. Also, a broker may not have great rates in one pair, but may beat the competition in another. FXOpen for example has the best rates for the USDCAD, but is middle of the pack with the other pairs.
When looking for a forex broker, rollover rates are just one factor to consider…if you hold a lot of trades overnight. For day traders, rollover rates are a non-issue since trades are not held overnight or past 5pm EST.
Finding Rollover Rates On Your Trades
How much you have been credited or debited shows up as a dollar amount in your trading account. This amount is typically called Swap. If you held a position overnight, refer to that amount to see how much you were debited or credited.
If you haven’t held the position overnight yet, and want to see how much you will be paying/receiving, on their website your broker likely provides rollover rates on their Product Specifications page. You can also see current rollover rates in MetaTrader4 by right-clicking on a pair in Market Watch (Ctrl+M) and then clicking Specifications. On the Specifications page, scroll down until you see Swap Long and Swap Short. A positive number indicate you will receive a credit for being on that side of the trade (long or short). Negative numbers indicate you will be debited swap for being on that side of the trade. Occasionally both are slightly negative, and this typically means that the interest rates are nearly the same.
By Cory Mitchell, CMT
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