When keeping positions overnight while trading forex, you will inevitably come across the fee charged by your broker to perform rollovers.
Basically, for individual trading forex via retail forex brokers, a rollover fee in the forex market consists of the amount that the broker will charge or pay for you to hold a trading position overnight.
Rollover Fees and Interbank Tom/Next Swaps
This rollover fee charged by your broker is directly related to the so-called Tom/Next swap that is sometimes abbreviated T/N.
This swap is usually expressed in pips or fractions of pips, and it is typically charged by forex forward market makers operating in the over the counter or OTC market for you to swap out a position from value tomorrow or tom until the next trading day, which will then be spot.
Professional forex traders that have held spot positions overnight from the previous trading day will generally perform any necessary tom/next swaps on those positions as one of the first things they do in the morning after they arrive at work.
Rollover Fees at Retail Forex Brokers
In passing on their costs of doing business, most retail forex brokers will charge a rollover fee for positions held past their stated cutoff point. The fee will usually be expressed in pips and will be similar to and based on the tom/next swap fee prevailing in the forex forward market.
Rollovers will usually be executed automatically by the broker whenever a retail trader holds a trading position after the 5:00 PM New York time cutoff.
In addition to the rollover fee, retail forex brokers will also usually charge a bid/offer spread on performing rollovers. As a result, they will generally pay you less to roll a long position on the higher interest rate currency in a currency pair than you will pay to roll a short position in the same currency pair.
Those traders who intend to hold positions over a long time frame – such as trend traders or carry traders for example – are especially exposed to the costs incurred by this rollover spread if they just allow their retail forex broker to roll their positions out until the next day automatically every night.
Accordingly, if you plan on holding long term forex positions, then you might want to check around with various brokers to compare their rollover spreads.Also, if you have access to the forward market, you can roll the trades out to a future date rather than allowing automatic rollovers to occur.
The Valuation of Rollover Fees
Basically, rollover fees will depend on interest rates differentials and the resulting cost of carrying a position overnight. Accordingly, if you intend to hold a long position in a higher interest rate currency against a lower interest rate currency, then you can expect to be paid the rollover fee by your broker.
Alternatively, if you plan on holding a short position in the higher interest rate currency and a long position in the lower interest rate currency overnight, you should then expect to pay the rollover fee to your forex broker.