What does rollover mean in the context of the forex market?

By Casey Murphy AAA
A:

In the forex (FX) market, rollover is the process of extending the settlement date of an open position. In most currency trades, a trader is required to take delivery of the currency two days after the transaction date. However, by rolling over the position - simultaneously closing the existing position at the daily close rate and re-entering at the new opening rate the next trading day - the trader artificially extends the settlement period by one day.

Often referred to as tomorrow next, rollover is useful in FX because many traders have no intention of taking delivery of the currency they buy - rather, they want to profit from changes in the exchange rates. Since every forex trade is transacted by borrowing one country's currency to buy another, receiving and paying interest is a regular occurrence. At the close of every trading day, a trader who took a long position in a high yielding currency relative to the currency that he or she borrowed will receive an amount of interest in his or her account. Conversely, a trader will need to pay interest if the currency he or she borrowed has a higher interest rate relative to the currency that he or she purchased. Traders who do not want to collect or pay interest should close out of their positions by 5pm ET.

Note that the interest that is received or paid by a currency trader in the course of these forex trades is regarded by the IRS as ordinary interest income or expense. For tax purposes, the currency trader should keep track of interest received or paid, separate from regular trading gains and losses.

To learn more, see A Primer on the Forex Market, Getting Started In Forex and Common Questions About Currency Trading.

RELATED FAQS

  1. How do I implement a forex strategy when spotting a Triple Bottom Pattern?

    Learn about the triple bottom pattern and how it is used to create effective trade strategy in the forex market, including ...
  2. How does inflation affect the exchange rate between two nations?

    Understand how inflation can affect foreign exchange rates of a currency and how it is just one of many economic factors ...
  3. How do I use Positive Volume Index (PVI) for creating a forex trading strategy?

    Understand the basics of the positive volume index and how investors in the forex markets use this contrarian indicator to ...
  4. How do I place a stop loss order?

    Learn how to place a stop-loss order and how traders use stop orders to either limit potential losses or to protect part ...
RELATED TERMS
  1. Forex Spread Betting

    A category of spread betting that involves taking a bet on the ...
  2. ICE LIBOR

    See LIBOR
  3. WM/Reuters Benchmark Rates

    Spot and forward foreign exchange rates that are used as standard ...
  4. Exchange Rate

    The price of a nation’s currency in terms of another currency. ...
  5. Open Position Ratio

    The percentage of open positions held for major currency pairs ...
  6. Indirect Quote

    A currency quotation in the foreign exchange markets that expresses ...

You May Also Like

Related Articles
  1. Forex Strategies

    Understanding Peer-to-Peer Foreign Currency ...

  2. Forex Strategies

    The Top 10 Forex Brokers for Beginners

  3. Chart Advisor

    Trade A Surging U.S. Dollar With These ...

  4. Chart Advisor

    Trade Market Volatility With These ETFs

  5. Fundamental Analysis

    Forex Exotic Currency Trading: Risks ...

Trading Center