Explain rollover when trading
Rollover, also known as “Swap” or “Overnight Financing,” is a fundamental concept in trading that applies to markets that operate on a 24-hour basis, such as the forex (foreign exchange) market and some CFD (Contract for Difference) markets. Rollover occurs when a trader holds a position open beyond the end of the trading day, and the position is automatically rolled over to the next trading day. It involves the simultaneous closing of the current position at the end of the trading day and the reopening of the same position for the next trading day.
The reason for rollover is that these markets have a settlement period where physical delivery of the underlying asset (in the case of futures contracts) or the actual exchange of currencies (in the case of forex) would occur. Since most retail traders are not interested in taking physical delivery or exchanging currencies for immediate settlement, the positions are automatically rolled over to avoid this process.
The main purpose of rollover is to account for the difference in interest rates between the two currencies involved in a forex trade or the cost of holding certain financial instruments, such as CFDs, overnight. In forex trading, it’s known as the
“Swap Rate” or “Swap Points,” and in CFD trading, it’s often referred to as the “Financing Rate.”
Depending on the direction of the trade and the prevailing interest rates, rollover can either be positive (credited to the
trader) or negative (debited from the trader’s account). If a trader is long (buying) a currency or a CFD, they may receive an
interest credit. Conversely, if they are short (selling) a currency or a CFD, they may pay an interest charge.
Rollover rates are usually expressed in pips for forex trades or as a percentage for CFDs and are visible on the trading platform. The rates can vary depending on the broker, the specific currency pair or instrument being traded, and the prevailing interest rate differentials between the currencies involved.