How to Calculate Rollover Interest?

In the Foreign Exchange Market or Forex market, Rollover is a method of stretching the arranged clearing date or what is known as the settlement date of an open position. Mostly, in common currency trades, trades ought to be completed in two business days and traders who wish to stretch their positions with no intention of settlement must close their positions before 5:00 in the afternoon Eastern Standard Time on the date of settlement day, plus re-opening of them the next trading day. This means by rolling over the position, this at the same time closes the existing positions at the daily close rate and again coming into a new opening rate at the next trading day. This precisely means that the trader is indirectly extending the settlement day by one more day.

This is also known as tomorrow next strategy, it is functional in forex due to many traders have no purpose of getting delivery of the currency they buy but instead they have the intention of getting profit from fluctuating exchange rates. Since rollovers shove out the settlement by another two trading days, it may cause a gain or a cost to the trader depending on the existing rates.

Apparently, Rollover is when you reinvest funds from a mature security into a new issue of the similar security or same security. You are transferring the holdings of one retirement plan to another without the agony of tax effects. Plus a charge is incurred by Forex investors who extend their positions on the following delivery date.

Rollover interest is the net effect of the money borrowed by an investor to purchase another currency and such interest is paid on the borrowed currency and earned on the purchased currency. To calculate this interest, you should get the short-term interest rates on both currencies, the existing exchange rate of the currency pair and the number of the currency pair purchased. For instance, an investor possesses 15,000 CAD/USD. The present rate is 0.9155, the short term interest rate on the Canadian dollar (base currency) is 4.50% plus the short term interest on the US dollar (quoted currency) is 3.75%, so the interest would be $33.66 [{15,000 x (4.50% - 3.75%)} / (365 x 0.9155)].

If on the contrary, the short term interest rate on the base currency is lower than the short term interest rate of the borrowed currency, the interest rate would result into a negative number which may reduce the value of the investor’s account. Such interest can be avoided by taking a closed position on the currency pair. If an option is about to expire is quite favorable to grip, you can either buy or sell the later expiring option. Always note the interest rate that is paid by a currency trader or he may received in the course of these forex trades is considered by the IRS as ordinary interest income or expense. For taxation, the trader of the currency should always keep track the interest received or paid, separate from regular trading gains or losses.

Article by ForexFloor

Things You Should Know About Forex Trading

How difficult is it to make money trading the Forex market? How much time does it take to actually be able to make a living trading the Forex market? These and other important aspects of trading are to be discussed in this article.

Trading the Forex market has many benefits over other financial markets, among the most important are: superior liquidity, 24hrs market, better execution, and others. Traders and investor see the Forex market as a new speculation or diversifying opportunity because of these benefits. Does this mean that it is easy to make money trading the Forex Market? Not at all.

Forex brokers agree that 90% of traders end up losing money, 5% of traders end up at break even and only 5% of them achieve consistent profitable results. With these statistics shown, I don’t consider trading to be an easy task. But, is it harder to master any other endeavor? I don’t think so, consider musicians, writers, or even other businesses, the success rates are about the same, there are a whole bunch of them who never got to the top.

Now that we know it is not easy to achieve consistent profitable results, a must question would be, Why is it that some traders succeed while others fail to trade successfully in the Forex market? There is no hard answer to this question, or a recipe to follow to achieve consistent profitable results. What we do know is that traders that reach the top think different. That’s right, they don’t follow the crowd, they are an independent part of the crowd.

A few things that separate the top traders from the rest are:

Education: They are very well educated in the matter; they have chosen to learn every single and important aspect of trading. The best traders know that every trade is a learning experience. They approach the Forex market with humility, otherwise the market will prove them wrong.

Forex trading system: Top traders have a Forex trading system. They have the discipline to follow it rigorously, because they know that only the trades that are signaled by their system have a greater rate of success.

Price behavior: They have incorporated price behavior into their trading systems. They know price action has the last word.

Money management: Avoiding the risk of ruin is a primary subject to the best traders. After all, you cannot succeed without funds in your trading account.

Trading psychology: They are aware of every psychological issue that affects the decisions made by traders. They have accepted the fact that every individual trade has two probable outcomes, not just the winning side.

These are, among others, the most important factors that influence the success rate of Forex traders.

We know now that it is not easy to make money trading the Forex market, but it is possible. We also discussed the most important factors that influence the rate of success of Forex traders. But, how much time does it take to have consistent profitable results? It is different from trader to trader. For some, it could take a life time, and still don’t get the desired results, for some others, a few years are enough to get consistent profitable results. The answer to this question may vary, but what I want to make clear here is that trading successfully is a process, it’s not something you can do in a short period of time.

Trading successfully is no easy task; it is a process and could take years to achieve the desired results. There are a few things though every trader should take in consideration that could accelerate the process: having a trading system, using money management, education, being aware of psychological issues, discipline to follow your trading system and your trading plan, and others.