I am currently in a $AUDUSD short position from 2 days ago. I am planning to hold onto this position for about a month or so.
Now I see that my rollover / interest / carry-over per day is $6! Every single day!
Even stranger, yesterday before setting up my limit order to take profit, it was just $4… hmmmm?
It’s not cool when you consider that it means that I will have to give back about $180 in rollover fees in the end, cutting into my pretty profits.
What’s the deal with this? Does anybody know how it’s calculated, how I can structure my trade to perhaps not pay as much or anything else that could be useful?
Hello, I was writing something about it but I have remembered I have a summary of the explanation given by FXCM:
Rollover is the interest paid or earned for holding a position overnight. Each currency has an interest rate associated with it, and because forex is traded in pairs, every trade involves not only two different currencies, but their two different interest rates. If the interest rate on the currency you bought is higher than the interest rate of the currency you sold, then you will earn rollover (positive roll). If the interest rate on the currency you bought is lower than the interest rate on the currency you sold, then you will pay rollover (negative roll).
When you buy the EUR/USD pair, you are buying the euro, and selling the U.S. dollar to pay for it. If the euro interest rate is 4.00%, and the U.S. rate is 2.25%, you are buying the currency with the higher interest rate, and you will earn rollover – about 1.75% on an annual basis. If you sell the EUR/USD pair, you are selling the currency with the higher interest rate, and you will pay rollover – about 1.75% on an annual basis, since you are paying the euro interest rate and earning the U.S. interest rate.
If you have other questions I’m happy to help you
Good luck
I always knew that it existed but only recently started swing trading where it’s starting to have an effect. And then I start with the pair with the widest difference in interest!
In the book “Millionaire Traders,” it’s interesting as they feature a trader who plays the rollover rates. He literally makes money off the % gains and yields of currency pairs.
I’m pretty sure in order for it to be favorable, it would have to be a longer term holding period.
You’ll get charged for weekend rollovers as well. I guess the rule of thumb for holding long term trades is pick a pair where the interest rate differential favours you or is minimal or move into futures.
If you hold a trade from Friday to Monday, you’ll pay 1 day of rollover unless it’s a holiday affected week. Here’s a rollover calendar that shows how many days worth of rollover interest are applied each day for trades still open at 5pm New York time. In a typical week with no holidays, there is 1 day worth of rollover interest applied each weekday for trades still open at 5pm, except for Wednesday when you earn or pay triple rollover.
In regards to futures, they won’t help you avoid paying rollover, since the interest cost is factored into the price. The way I have dealt with trades where I am paying roll from day to day is to factor that into my risk-reward before even opening the trade.
Cyanidez,
You mentioned that you envision possibly holding this trade for a month. Here is something to consider. If you had known the rollover costs before opening the trade, then you could have added this cost to the losses you would incur if you get stopped out on the trade. I don’t know all the details of your trade, but suppose your gross P/L loss would be $500 if you get stopped out. If you add that to $180, then your total net risk (estimated) would be $680. Let’s suppose further that your gross P/L gain would be $1000, if your trade reaches its profit target. You would have to subtract $180 from this to get your estimated net profit of $820. In this example, a gross risk reward of 2 to 1, turned into a net risk reward of only 1.20 which is probably not even worth trading.
Again, I don’t know the risk reward profile of your specific trade setup and the risk reward potential may be much better, but it’s just something to think about when trading against the roll. On the flip side, when trading with the rollover, the interest you collect day to day can improve the odds for success. In fact, there is a whole strategy built around this called carry trading, though it’s not been as popular since central banks around the world started lowering the interest rates drastically.
Don’t take this to mean that shorting AUD/USD is a bad idea. In fact that are a lot of signals pointing to a potential drop. The main point is to think of trading against the rollover as a precision strike mission. You get in; you get out. Timing is much more crucial than if you have rollover working on your side. Choosing to enter your position before some catalyst event (perhaps a central bank announcement) which has the potential to trigger a break in favor of your trade in a relatively short time frame. If the news doesn’t pan out the way you had hoped, you can close out the trade, even if your stop wasn’t hit. Try again later before another potential catalyst event. Does this mean that sometimes you’ll close the trade only to watch the market break if your favor after the fact? Sure, but from a cost benefit standpoint it might improve your odds in the long run.
Extract from investopedia.com in “overnight-position”
“…
The 5:00pm EST deadline is a very strict division. If a trader entered into a position on Monday at 4:59pm EST and closes it on the same Monday at 5:03pm EST, this will still be considered to be held overnight because it was held past 5:00pm EST and then is subject to rollover. Likewise, a position opened on Monday at 5:01 pm EST will not be considered an overnight position unless it remains open past the following Tuesday at 5:00pm EST.
…”
Is this factual? If so, one can close the position 4:59 everyday, and reopen 5:01… I guess you would need to factor in cost of doing that (commision/slippage/effort).
Compare that to paying the overnight interest rate.
It is factual. If you closed the trade before 5:00pm EST, you would not earn or pay rollover. But of course as you mentioned, you would incur any spread/commission costs that result from closing then re-opening the trade. I think you would find that in most cases the transaction costs would likely be more than potential rollover costs. Plus another significant risk is that of the market movement itself during the period when your trade is closed. For example, if you close the trade and the market moves against you 10 pips, then you would be entering back into the market at a worse price plus any spread or commission paid.
There are certain times of the year when rollover is very large such as the golden week holiday in Japan. Maybe it could be advantageous during periods such as this, but you also have to factor in the market could be more volatile during this period as well if many other traders are doing the same thing.
As with much in life, you have to weigh the potential risk with the reward. I would suggest looking at historical charts for indications of how the markets have reacted to these periods. (Past performance is not indicative of future results )
)