Explain rollover when trading
Rollover, also referred to as “Swap” or “Overnight Financing,” constitutes a fundamental principle in trading that pertains to markets functioning on a 24-hour cycle, including the foreign exchange (forex) market and select Contract for Difference (CFD) markets. Rollover transpires when a trader sustains an open position beyond the conclusion of the trading day, leading to the automatic transfer of the position to the following trading day. This process entails the simultaneous closure of the existing position at the day’s end and the subsequent reopening of the identical position for the subsequent trading day.
Rollover exists because markets like these incorporate a settlement interval wherein the physical delivery of the underlying asset (in the context of futures contracts) or the actual exchange of currencies (in the context of forex) would transpire. Given that the majority of retail traders are not focused on immediate physical delivery or currency exchange, positions are automatically transitioned to the subsequent period to circumvent this procedure.
The primary objective of rollover is to accommodate the variance in interest rates between the two currencies implicated in a forex transaction or the expense incurred for retaining specific financial instruments, like CFDs, overnight. In the realm of forex trading, this is recognized as the “Swap Rate” or “Swap Points,” while in the domain of CFD trading, it is commonly denoted as the “Financing Rate.”
Rollover’s outcome hinges on the trade’s orientation and the prevalent interest rates; it can be either positive (credited to the trader) or negative (debited from the trader’s account). If a trader is holding a long (buy) position in a currency or a CFD, they might receive an interest credit. Conversely, if they are maintaining a short (sell) position in a currency or a CFD, they might incur an interest charge.
Rollover rates are commonly presented in pips for forex trades and as a percentage for CFDs. These rates are typically visible on the trading platform. Their values can fluctuate based on factors such as the broker, the particular currency pair or instrument being traded, and the existing interest rate disparities between the currencies implicated in the trade.