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What are forex rollovers or overnight fees?

If you have been using the MT4 trading platform, then chances are that you have come across something called overnight or rollover fees. At times, if you have kept a position open overnight, you would see that your broker charged you (debited or credited) you with an additional amount.

These additional fees are nothing but rollovers. In basic terms, a forex rollover is the interest that is paid to or earned when you hold a currency pair or even a CFD position overnight. You cannot avoid rollovers and do not mistake this to be a fee that is charged by your forex broker just because they want to.

Forex rollovers are important as they follow the convention in the currency markets and the interest rates associated with it. One of the key things about rollovers is that because forex currency pairs are involved, there are two interest rates that are involved.

No one lends you money interest free. And in forex, when you are trading on leverage, you are basically borrowing extra money from your forex broker. As a result, the forex broker either pays or deducts interest when you have a position that is kept open overnight.

How does forex rollover work?

The first thing to understand a forex rollover is the interest rates that are at play.

When you trade forex, you are simultaneously buying one currency and selling the other currency or vice versa. Along with this comes the interest rates for these respective currencies.

So, if the base currency’s interest rate is 1% and the quote currency’s interest rate is 2%, then when you are long on base/quote, the interest rate differential is applied. Therefore, you will be paid 1% interest for the base currency while you will be deducted 2% interest from the quote currency.

This leaves you with having to pay 1% for the position.

Given that interest rates continue to vary over time, the forex rollover keeps changing.

An important thing to bear in mind is when the rollovers are charged. While we have 7 days in a week, you can only trade 5 days in the week. However, interest is charged for the other two remaining days too. Therefore, when you have a position that is left overnight on a Monday, Tuesday, Thursday, Friday, you are charged the overnight fee.

But on Wednesday’s a triple rollover is charged. This is made up of the overnight rollover for Wednesday and the rollover for Saturday and Sunday.

Example of a forex rollover

Let’s assume that the interest rate for AUD is 2% and the interest rate for USD is 1%. You opened a position of one standard lot which is 100,000 units of currency. To get a one-day interest rate, you will simple divide the annual interest rate by 365.

The table below gives an example.

Currency Interest rate Interest Interest/Day

Currency Interest rate Interest Interest/Day
AUD100,000 2% AUD2000 AUD5.48
USD100,000 1% USD1000 USD2.74



From the above table, you can see that if you are long AUD, you get an interest of AUD5.48, but if you are short on USD, you will be deducted USD2.74. but if you notice, the currencies are different. To get to the next step, you need to look at your trading account’s base currency.

For simplicity’s sake, let’s assume that you have a USD trading account. This means that your AUD5.48 must be converted into USD. Taking the currency spot rate of AUDUSD at 0.80, then your AUD5.48 becomes USD6.85.

Now, we can get the actual rollover amounts that you will be charged.

Currency Interest rate Interest Interest/Day Interest (USD)
AUD100,000 2% AUD2000 AUD5.48 USD6.85
USD100,000 1% USD1000 USD2.74 USD2.74

 

Finally, we can get the amounts.

If you are long AUDUSD for 1 standard lot and kept your position open overnight, you will be charged (6.85 – 2.74) = 4.11. Alternately, if you are short AUDUSD for 1 standard lot and kept this position open overnight, you will be charged (2.74 – 6.85) = -4.11.

And taking this further, if you opened your position on a Monday and closed the following Monday, your total rollover will be either -28.77 or +28.77 for one standard lot (long and short).

Why should you pay attention to forex rollovers?

Forex rollovers are important because they can eat into your profits depending on whether the rate is positive or negative. Over a short period of time, the rollovers can lead into a significant amount that will erode your bottomline profits.

While the amounts are negligible for smaller trading lots, it is still important to account for these overnight rollover fees. There is no way of avoiding them, even if you are thinking of jumping to another broker. The best way is to ensure that you are aware and if possible, trade only intraday to avoid these additional costs.

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