What Are Rollover and Swap and How to Use Them When Trading?
Depending on the trading style, Forex day traders may be faced with additional profits or expenses when it comes to holding positions open overnight.
If you are only planning on opening and closing your trades within one day, you won't need to worry about that, but it is still worth learning about in case you change your strategy or want to experiment with extended orders.
When a person opens and closes a position within one day, they do not have to pay additional interest. However, if they choose to hold the position open overnight, they need to consider the Forex rollover.
What is rollover?
Rollover is a process when the position is held open overnight. When that happens, the interest rates of the currencies in the FX pair are counted against each other. Depending on the interest rates, the trader is either credited or charged a particular sum.
What is the swap rate and how is the swap calculated?
The sum that the trader can gain or lose due to rollover is called swap. The rollover may result in swap benefits or swap charges, depending on the interest rate differentials. The interest rate of each currency is set by the country's central bank. Usually, the interest rates are influenced by major economic events in the country, which you can monitor in the economic calendar.
The swap rate is the interest rate of one currency in the pair minus the interest rate of the other one. Which currency you subtract from depends on the kind of trade you're opening: long or short.
Swap Long and Swap Short in Forex Trading
Long trade (or bullish trade) is basically when you make a purchase with the expectation the currency you bought will go up in value, and you will profit from this. Short trade (or bearish trade) is the opposite: you sell the currency pair with the expectation to profit from it losing in value. So, if in the EURUSD pair you are going long (buying euro and selling the US dollar), to calculate the swap, you subtract the dollar interest rate from the euro interest rate. If you're going short, you subtract the euro interest rate from the dollar interest rate.
Thankfully, you don't need to manually calculate the swap every time you engage in Swap trading: there are special tools for that. You can open the Contract specifications page to monitor the Forex Swap rates table: our table includes Swap Long and Swap Short rates.
Let's look at an example: take the AUDCAD Forex pair.
Swap Long (in this case, 0.12) is the interest rate that is applied to your trade if you buy AUDCAD and keep the position overnight (meaning that you will gain an additional 0.12 points on your order). At the same time, the Swap Short (-5.57) is the interest rate that will be applied to your sell order if you hold it overnight (meaning that you will lose 5.57 points on your order). The figures are shown as points, which is a measure of the smallest price movement, so they do not represent any specific currency. They change depending on the Forex pair volatility, so you need to keep a close eye on the financial events calendar and Forex news.
You can also see the current Swap Long and Swap Short figures for a specific pair in your trading platform. For example, in MetaTrader 4 click the right mouse button on the currency pair and choose Specification. You might need to scroll down in the window that opens.
The rollover happens typically at 5 p.m. Eastern Standard Time (GMT-5) every weekday – at the end of the New York session. However, there is one special day for rollover – Wednesday.
Suppose you decide to keep the position open overnight after the Wednesday session is finished. In that case, the swap will be multiplied by three to account for rolling over the weekend when the Forex market is not working.
The triple Swap, or 3-day Swap, happens on Wednesday because most instruments need two business days to be settled (for all the financial transactions to be completed). So, if you open a position on Wednesday, it will be settled on Friday. If you roll the Wednesday position over to Thursday, the Swap rate will also account for rolling the position over the weekend – thus the triple rate.
Forex trading is welcoming to people of all beliefs. Some brokers recognize that the Islamic faith prohibits its followers from receiving or paying interest and create special conditions for them. For example, the FBS has a swap-free option for Muslim clients who also want to enjoy trading and hold positions open overnight but cannot pay or receive swap interests on their positions.
Watch this video from our analyst to better understand the topic. If you're not a native English-speaker, try looking for your language in the list of subtitles available.