What is rollover and what does it mean in trading?
What is rollover?
Rollover – also known as 'swap' – is the interest you pay or earn when you hold a position overnight.
Put simply, if the interest rate on the currency you bought is higher than the interest rate of the currency you sold, you will get paid for the overnight position. 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 according to the swap table.
Here’s a quick example...
Let’s say you buy one standard lot of the GBP/USD currency pair at an exchange rate of 1.30. That means you need 100,000 GBP to receive 130,000 USD. So far, very straightforward. How though do we then find the rate of interest which is to be charged or received? Again, that is fairly straightforward - the rates are based on the current interest rate within that country. So, for the GBP that is obviously the Bank of England, and for the USD, that is the Federal Reserve. Therefore, in our hypothetical example, we might end up with a situation as below:
- The interest rate on the GBP is 0.25% (current rate at the Bank of England)
- The interest rate on the USD is 0.5% (current rate at the Federal Reserve)
As we can see, the difference between these two rates is 0.25% which becomes the basis of how much interest would be charged. As it is obviously relatively worse in this example to hold GBP than USD, if you did decide to buy GBP/USD you would own GBP and gain 0.25% but you would be short USD so debited 0.5% - leaving you with a net deficit of 0.25% (remember whenever you trade in currency pairs you are always long one currency and short another). This difference in interest rate is known as ‘interest rate differential’. And of course, if you were selling GBP/USD in the above example, it would be an opposite scenario, and you would earn 0.25%.
The above example is a very basic explanation and there are other factors to consider if you are holding trades open for a long period (weeks or months). For instance, the calculation will never be as simple as the one above, for various reasons, such as the fact that interest rates often change, the levels of interest that brokers charge vary to what central banks charge, and also rates must be calculated on a daily and not yearly basis. However, what we have done is made our Rollovers charges as easy to find and transparent as possible. And don’t worry, the Skilling platform automatically works them out for you and updates your account at around 11pm CET every night! Please see here to view all our Rollovers/swap rates.
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