I understand that if I leave a position open past 5 PM EST, I will pay interest on the entire leveraged currency I “borrow” and earn interest on the entire leveraged currency I purchase. Now, the margin is necessarily drawn out of my account. It’s my money that I’m using, so why is that part of the entire leveraged currency considered a loan? Now suppose that I’ve got the entire leveraged amount covered in my account, as well, not just the margin. Again, it’s my money that’s already in my account that I’m laying on the line, not borrowed money, so why is that considered a loan? Also, I don’t understand why I earn interest on the currency I purchase? Please enlighten me.
To summarize: Why do I pay interest on
the margin, which necessarily is drawn from my account and is therefore not a loan, and
the fully leveraged amount if the full amount is already in my account.
Why do I earn interest on the currency I purchase?
+1 on that (unless you have a big enough amount to trade, then it can make an impact). On the other hand traders with small accounts and high rollovers can see their small account balance eaten up as well. It all depends on which pairs you trade, what lot size you use and how long you hold your trade.
When you trade a currency pair, you simultaneously go long one currency go short the other. At the time you initiate the trade, since you exchange equivalent amounts of the two currencies, you don’t have to put up the full face value of the position. Instead, you are able to trade on margin which is there to cover for fluctuations in the exchange rate while you position is open.
Someone who is long the currency is entitled to earn this interest, while someone who is short is obligated to pay this interest. It’s just like when you deposit money in a savings account at your bank, you can earn interest, but if you borrow money then you must pay interest.
Suppose you buy GBP/USD. You will earn the GBP interest and pay the USD interest, if your trade is open at 5pm New York Time when trading positions are rolled over from one day to the next. This article has more info on how rollover interest is calculated: Understanding Foreign Exchange Rollover
I think your answer helps put things in perspective. As I cram my head full of concepts and formulas before I even make my first mock trade, I’ll work to get a handle on Rollover Interest.
Well, the other choice is to find a rollover free account. Never used one of those though.
My strategy generally involves only looking to buy the higher yielding currency, unless I am planning to close the position at the end of the day. For example - I almost never sell NZD/USD unless I see a lot of downside momentum and I am planning to be in the trade only for couple of hours
I went long yesterday on gbpnzd and I see your point, the rollover is a lot bigger than my usual pairs. However, as its gone 150 pips in my favour I can live with it this time
Rollover interest can be used as a lucrative strategy.
I did some calculation and run the experiment. If you guys are interested, you can read the finding on google “forex passive money making machine”. Of course, there is risk involved (I could say it is “calculated” risk involved).
I am new to Forex and opened tiny account on Oanda of $100 to practice and been making a lot of trades for a week average
1 to 5 cents a pip so 100 to 500 units and I am up $0.22 and paid appox $.04 in interest making it $0.18.
That is 18% of profit! would that be the same the higher I go unit wise. When I get up to full lots(100,000 units) I would still have 18% going to interest after spread?
I know it depends on which pairs and long or short and current interest rate but I mean on the same trades I made for a week and paid 18% with tiny money would that have been 18% if trading full lots?
[QUOTE=“Forexgrinder;701953”]I am new to Forex and opened tiny account on Oanda of $100 to practice and been making a lot of trades for a week average 1 to 5 cents a pip so 100 to 500 units and I am up $0.22 and paid appox $.04 in interest making it $0.18. That is 18% of profit! would that be the same the higher I go unit wise. When I get up to full lots(100,000 units) I would still have 18% going to interest after spread? I know it depends on which pairs and long or short and current interest rate but I mean on the same trades I made for a week and paid 18% with tiny money would that have been 18% if trading full lots?[/QUOTE] Wouldn’t that be .18%? 18% of $100 is $18?
The $100 doesn’t matter for the calculation. Out of a post spread profit of $0.22, The interest was $0.04 for a week of trading. .04 is 18% of .22
So I was just wondering if it scales up the same for higher amounts, like if my positions were 1000 times higher all week for the same things then $40 interest out of a $220 profit is pretty damn steep.
I guess it might average out because other weeks I might have a lot of positions that pay me interest.
The strategy that I mean can actually be simplified as “buy and hold the high yield currency while shorting the low yield currency”. There are lots of info on the web. I also blogged about it but this forum does not allow me to post the link.
Let say for this 2 currencies EUR and TRY and their interest rates stated below (source from Oanda):
CURRENCY BID ASK DATE
EUR 0.0000 0.4000 Wed Apr 15 10:08:37 2015
TRY 6.4000 9.8000 Tue May 5 18:07:50 2015
If you buy TRY, you earn 6.4% on interest and if you sell EUR, you pay 0.4% on interest.
In this case, if you open a short position on EUR/TRY, you earn an interest return of 6.4 - 0.4 = 6% per annum on the amount you open your position. If you increase your trading amount using leverage (Oanda offers 1:20 leverage for exotic currency pairs) to twice the amount of your account balance, you basically increase the return to 6 x 2 = 12% per annum.
Of course there is risk involved as stated in my earlier post.
Again I’d like to say that I appreciate your extended answer, but there’s something I’m still not getting. Suppose my margin and my full traded amount are covered by the balance in my account. (Example: I plop down $100 on a 2% margin. My full traded amount is $5000. It’s more than covered by the $8000 in my account.) It’s all my money I’m laying on the line. Even if I lose the $5000, it’s fully covered. So who am I borrowing from that I’d need to pay interest to?
