The Complete Guide To Forex Rollover Rates Calculation (2024)

Trading in the Forex market can be challenging. There are a lot of opportunities and possibilities for making money and different trading options offered by brokerage companies.

Trading in Forex is known to be less volatile than other instruments because of the high liquidity, which is why many traders invest in the long term. However, holding the position for more than one day entails swap or Forex rollover rates that are credited/debited from the investor’s account.

It is one of the most critical terms in trading currencies. Let’s explain the Forex market rollover meaning and how to calculate it accurately.

• Rollovers are fees relating to running a Forex trading order overnight.

• Brokers may charge or pay these charges according to the interest rate differentials between the traded currency pairs.

• Forex brokers charge triple rollover fees on Wednesday to compensate for the order settlement cycle (T+2).

A rollover means keeping a currency pair trading order open overnight. Keeping the order unsettled for an additional day is a common practice for Forex traders who seek to capitalise on long-term gains.

The Forex market is less volatile than other instruments like crypto or commodities, especially when trading with major currency pairs like EUR/USD, USD/JPY, GBP, USD, and others. These pairs fluctuate moderately, and most investors make money from executing a large number of lots or running the order for several days.

When a broker offers a rollover Forex swap, the procedure is automatically done, and the trader does not need to process anything manually.

When a Forex swap happens, the broker closes the trader’s position by the end of the session and opens a new one as a new trading day starts. The closed order is settled using the spot price, while the new position is executed using forward contracts

The rollover rate is the amount of money the trader pays or receives as a result of this process. There are different factors that affect the Forex rollover rates calculation as follows.

• Interest rate differentials: Each currency is associated with an interest rate defined by its local central bank. The difference between the interest rates between the currency pairs is used to determine the rollover rate.

• Currency pair type: Currency pairs have different volatility, interest rate differential and liquidity. The Forex swap rate for major pairs differs from exotic currency pairs.

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• Short vs long position: Holding a sell or buy position results in different FX swap rate calculations. If the base currency’s interest rate is higher than the quoted currency, the long position pays the trader, while short positions require the investors to pay, and vice versa.

The rollover rates are determined by the above-mentioned factors, especially the interest rate differentials, which are used by most FX traders to decide if they want to keep the order running overnight.

The Forex market operates 24 hours during the working days, and brokers charge these fees to compensate for simultaneously closing the spot and opening the forward position to keep the position active.

The rates can be credited or debited, meaning that the trader may pay or receive these fees based on the order type and the interest rate of each currency.

Note that overnight order rates are tripled on Wednesday (through Thursday).

This happens because the Forex settlement cycle is T+2, meaning that orders executed on Wednesday will be settled by Friday, and the FX broker has to bear the payments of Forex rollover interest rates differential for two days. Therefore, swap rates are tripled to compensate the broker.

The calculation of the Forex rollover fee can be complicated, yet it is essential to determine the gains or costs associated with running an active position till the next day.

For example, you are trading with the currency pair EUR/USD, and you want to keep the order overnight. Let’s assume that the interest rate for EUR is 2%, while for the USD, it is 3%, so the rate differential is 1%.

As we mentioned earlier, the base currency (EUR) has a lower interest rate than the quoted currency (USD). Therefore, the burden of paying the Forex rollover fees falls on the trader.

Let’s expand on this example and consider the trading value of EUR/USD = $1.05. Follow the swap rate formula below.

Rollover rate =(EUR Interest rate–USD Interest rate)/365*exchange rate.

Rollover rate = (2 - 3) / 365 * 1.05 ⇒ (-1) / 383.25

= -0.0026%

The negative amount means it is a cost that the trader must pay, while if the outcome is positive, the charge is rather paid to the trader.

Incurring overnight order charges can be costly, and if a trader misses out on this concept, these rates may offset any gains originally made from the position.

However, luckily, thanks to digitalised platforms, traders do not need to manually measure the credited/debited swaps, and most brokers offer a Forex swap interest calculator to quickly preview the expected charges of keeping the order active overnight.

Forex traders may execute long-term or short-term orders. Placing a short-term or intraday order does not come at additional costs or calculations as long as the investor concludes the order before the end of the day.

However, those who want to keep trades over the next day must carefully consider the type of currency pairs they place and the net banks’ interests.

To benefit from rollover rates, one must place orders on currency pairs that have a base currency with a higher interest rate than that of the quoted currency. Conversely, traders may go short on positions that include lower interest rates on the base currency or a negative net interest return.

If the differential is negative or expected to become negative for long orders, traders must close the order before 17:00 ET to avoid rollover charges.

The Forex swap must be carefully considered as it can highly influence your investing strategy and the expected profitability from the trading position. There are several challenges FX traders face when carrying a position overnight.

• Price fluctuations: Leaving a trading position active for many hours exposes it to risks coming from natural market dynamics. Any major news, trading shifts, changing trends, increased volatility, and economic changes can dramatically change the interest rate differentials and affect the outcome of your order.

• Inaccessibility to market: When the market closes, traders cannot access their market or interact with their positions to change or set a price limit.

• Overnight news: Major announcements usually take place after the trading hours are concluded, which imposes a risk if the news affects the traded currencies’ interest rates.

• Public Holidays/Weekends: Carrying a position during a bank holiday or a weekend is risky because the market does not work on Saturday and Sunday, and any major news or announcements can highly affect the rates on the next trading day.

Forex rollovers are charges associated with a currency position held overnight. These rates are calculated based on the difference between traded currencies’ interest rates of the corresponding central banks.

Accurately calculating the FX swap rates is important because they lead to either crediting or debiting the investor’s account based on the traded currencies, their interest rates, and the type of market order executed.