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**
Carry trades ATM are bout’ as popular as highway roadkill. Can’t believe you’re discussing rollovers at a time when the majority of investors are unwinding their long positions in higher interest earning commodity currencies. Everywhere you look, people (real traders, not bots) are scurrying back to their safe havens - the Yen and (incredibly) the Greenback.
some times when there is a horible economic setuations like this , the market is not clear like before related to the news , and the bigest economic country now is the states when it falls the rest follwed them so its not effective these days i think
Ok, alright…
I know, the timing for writing this post was probably wrong :)
But the underlying point is not in what market is doing NOW, but rather what brokers are doing EVERY DAY: they make unsuspecting traders pay negative rollover difference for pairs where this rollover should be positive!
Everything else, as you said, is global economy…
Does anyone know why, when you sometimes put on a trade where you’re paying out interest, even if the trade is only a 30k lot and held for an hour, the interest is $90???? Very steep. I think I got screwed and someone else made off like a bandit on a trade. The interest should have been close to NOTHING!
You can always have some check at least here:
http://www.alpari-forex.com/en/calculator/
http://www.eglobal-forex.com/clients/forex-calc/
Wrong Timing? Al I know is that I wanted to know this information and thanks to FDL I now have it. I trade based on technicals and my pip earnings thus far have exceeded the roll-over costs (actually some paid me ). The key info for me is what to do on Friday. If I hold a pair that costs me roll-over then I will give serious consideration to not holding the trade over the weekend. Since I’m hit with 3 days of fees on Wednesday for the hold-over. However, I may consider retaining a pair to earn the 3 days of interest (provided the technicals favor a hold).
Thanks Forex Dark Lord for the enlightenment.