Explain rollover when trading
Rollover, alternatively recognized as “Swap” or “Overnight Financing,” constitutes a pivotal concept in trading, pertinent to markets characterized by continuous operation throughout a 24-hour cycle, such as the forex (foreign exchange) market and certain CFD (Contract for Difference) markets. Rollover transpires when a trader maintains an open position beyond the conclusion of the trading day, leading to the automatic transition of the position to the subsequent trading day. This process entails the simultaneous termination of the ongoing position at the close of the trading day and the subsequent initiation of an identical position for the ensuing trading day.
Rollover is necessitated by the presence of a settlement interval inherent in these markets, wherein the actual bestowal of the underlying asset (in the context of futures contracts) or the tangible exchange of currencies (pertaining to forex) would transpire. As the majority of retail traders are primarily concerned with circumventing immediate physical delivery or currency exchange, positions are automatically transitioned to subsequent periods to avert engagement in this procedural course.
Rollover fundamentally serves to reconcile the disparity in interest rates applicable to the two currencies implicated in a forex transaction or the expense associated with retaining specific financial instruments, like CFDs, overnight. Within forex trading, this concept is labeled as the “Swap Rate” or “Swap Points,” while in CFD trading, it is commonly denoted as the “Financing Rate.”
Rollover’s outcome hinges upon the trade’s orientation and the prevalent interest rates, leading to either a positive outcome (credited to the trader) or a negative one (debited from the trader’s account). For traders in a long position (buying) of a currency or a CFD, the potential is to gain an interest credit. Conversely, traders involved in a short position (selling) of a currency or a CFD may incur an interest charge.
Rollover rates are commonly conveyed in pips within the realm of forex trades, and as a percentage in the context of CFDs. These rates are conspicuously displayed on the trading platform. The fluctuation of rates is contingent on factors including the broker’s policies, the particular currency pair or instrument under consideration, and the extant divergence in interest rates between the implicated currencies.