Forex lesson #6. Part 4. Interest rates and negative rollover
As an educated beginner or an experienced trader, you know a thing or two about interests and rollovers in Forex.
For holding a trading position open past 17:00 pm, brokers calculate a rollover on it. You won’t see this in your account history, but what actually happens is: during a rollover a position is closed and re-opened again. Because different countries have different interest rates for their currencies, an interest differential between currency pairs arises. This differential can be either positive or negative, which defines the outcome: interest is either earned or charged.
The list of pairs that collect positive interest when bought or sold and pairs that collect negative interest is well known to experienced traders.
All you need to do is to buy a currency with a high interest rate against the currency with a low interest rate.
Popular currencies with high interest rate are: USD (not the case with recent economic situation), GBP, AUD and NZD.
Popular currencies with low interest rate are: CHF and JPY.
Some pairs may change their positive interest earning features in the long run as country governments cut or raise interest rates, but overall the base list remains the same.
I’ve seen and you’ll see Forex brokers, who don’t care about those interest rate rules.
What would be better than making all Forex rollover interest negative?
“…Alright, let’s leave one pair with positive rollover for curious traders, but make everything else negative” — a simple trick used by a broker. Result — traders are discouraged to hold positions past 17:00pm — the rollover time. Holding positions for many days becomes expensive. What to do then? Avoid rollover and trade more frequently..? Well, that’s what brokers aim for!
Every trader may easily find what currency pairs should have a positive interest.
If you buy a currency pair where the base currency has a higher interest rate than the quote currency, then you’ll earn positive interest; if it is the other way around, you’ll pay interest. For example if you buy GBPJPY and the interbank interest rates in UK are higher than in Japan, then a rollover should be positive by the end of the day and your broker should pay you the interest. But, say, if interest rates in Japan were higher than in UK, then you’ll pay a rollover fee when you buy GBPJPY.
The only thing left to do is to learn what interest rates for currencies are now.
Uhhhh.. that’s bright..
Let’s take an example:
If EUR interest rate now is 3.25% and USD rate is 1.0%, this means that when you Buy EUR/USD you are going to earn interest (positive rollover), if you are to Sell EUR/USD you’ll pay interest (negative rollover).
Example:
If to calculate the interest for holding a Buy position on EUR/USD:
when buying EUR you earn 3.25%
when selling USD you pay 1.0%
Net total is 3.25% - 1.0% = 2.25% interest earned.
Simple, right?
Now, you can check the latest interest rates, define currency pairs that collect positive interest and compare results against your Forex broker rollover fees…
**Forex Dark Lord**
