Rollover is an important concept in trading, particularly for those involved in forex, futures, and Contracts for Difference (CFDs). At its core, rollover refers to the process of extending the settlement date of an open position. Since most trading instruments have a fixed settlement or expiry date, rollover allows traders to maintain their positions beyond that date without closing them. This extension typically involves paying or earning interest or fees, depending on the specific market and the nature of the position held.

In forex trading, rollover occurs because currency trades are technically swaps of one currency for another with an agreed settlement date, usually two business days after the trade date. To keep a forex position open overnight, brokers automatically “roll” the position forward to the next settlement date. This process can result in a rollover interest charge or credit, often called the “swap rate.” The amount depends on the interest rate differential between the two currencies involved. For example, if you are long the Australian dollar (AUD) against the US dollar (USD), and Australia’s interest rates are higher than those of the US, you might earn rollover interest. Conversely, if you are short the AUD/USD, you could pay interest.

Formula:
Rollover Interest = (Notional Amount × Interest Rate Differential × Days Held) / 360

The 360-day count is commonly used in the financial industry under the “money market” convention. The interest rate differential is the difference between the interest rates of the two currencies involved in the pair.

In futures trading, rollover is slightly different but serves a similar purpose. Futures contracts have set expiry dates, and if a trader wants to maintain exposure beyond the expiry, they must close the expiring contract and open a new contract with a later expiry date. Many brokers offer automatic rollover services to facilitate this. However, this process may involve paying a fee or experiencing price differences between contracts, known as the “roll yield.” This yield can be positive or negative depending on whether the futures market is in contango or backwardation.

For example, suppose you hold a long position in an S&P 500 futures contract expiring in June but wish to hold a position until September. You would need to rollover your position by selling the June contract and buying the September contract. If the September contract is priced higher than June’s, you pay the difference, known as contango. If it’s lower, you might gain from backwardation.

A common misconception about rollover is that it is always a cost to the trader. While this can be true, especially if interest rates or fees are unfavorable, rollover can also be a source of income, particularly in forex trading when holding currencies with higher interest rates against those with lower rates. Another mistake traders make is ignoring rollover costs, which can accumulate over time and significantly affect profitability, especially for swing traders or those holding positions for extended periods.

People often search for questions like “What is rollover in forex trading?”, “How is rollover interest calculated?”, or “Can rollover fees affect my trading profits?” Understanding rollover is crucial because it impacts your trading strategy and risk management. For instance, day traders who close positions before the market close generally avoid rollover charges, while long-term traders need to factor these costs into their plans.

In summary, rollover is the mechanism by which traders keep positions open beyond their standard settlement or expiry dates, involving interest payments or fees. Whether in forex, futures, or CFDs, understanding how rollover works, when it applies, and its potential costs or benefits is essential for effective trading.