One aspect of forex trading that can sometimes confuse new traders is that of rollover orders, and it is important to fully understand this concept if you are going to be holding open positions for longer than one day at a time. Typically most forex brokers will process their rollovers on any open positions at 5PM New York time, which will effectively be rolled over to the next trading day.
The market that most retail traders will be paricipating in is called the spot or forward market, and although you are placing trades based upon the prices that you are seeing on the screen in front of you, the actual process of buying and selling currencies on the spot market calls for the actual currency that is being bought or sold to be delivered in two days. In the same way that an oil trader has no interest in receiving raw barrels of oil delivered to his front door, a currency trader has no interest in taking physical delivery of the foreign currency he or she is trading.
In order to prevent the trader from ever needing to accept delivery of the currency, every evening as the markets close in New York any open positions will be rolled over to the next trading day, which effectively allows a trader to keep a buy or sell order open indefinitely. Depending on the interest rates of each currency, there will be a small amount of money that is either added to or taken away from the open position. It is the difference between the two interest rates that determines whether you will receive money or need to pay money at the time the rollover is processed.
Let’s say you are using typical 100:1 leverage and are trading one standard lot, and you have bought USD/JPY. In this example let us assume that the current interest rate for the USD is 1.75% and the interest rate for the JPY is 0.50%. In this trade we have bought dollars and sold yen, and the difference between the two interest rates is 1.25%. Since the dollar has the higher interest rate and we have bought dollars, at the time the rollover is processed, and since the interest rate is the amount that is earned over the course of one year, the amount of money that is added to the open position will be (1.25/365)*100,000.
In that example we take the differential of the two interest rates as a factor of the direction of the open position, divide that number by the number of days in a year which is 365, and then multiply that number by the size of the open position which is 100,000 to figure out how much is added to our open position.
Latest posts by admin (see all)
- How To Plan a Trade From Start to Finish - May 3, 2016
- How To Trade The Eur/Usd Right Now - April 29, 2016
- Eur/Usd Could Move Higher Based off of Support Pin Bar - February 19, 2016
Winner’s Edge Trading, as seen on: