Forex brokers truth: Interest rates and negative rollovers

As an educated beginner or an experienced trader, you know a thing or two about interests and rollovers in Forex. For holding a trading position open past 17:00 pm, brokers calculate a rollover on it. You won’t see this in your account history, but what actually happens is: during a rollover a position is closed and re-opened again. Because different countries have different interest rates for their currencies, an interest differential between currency pairs occurs. This differential can be either positive or negative, which defines the outcome: interest is either earned or charged to your account.

The list of pairs that collect positive interest when bought or sold and pairs that collect negative interest is well known to experienced traders.

Among the currencies that collect positive swaps/rollover are normally:

AUD/USD when Long (bought) USD/JPY, EUR/JPY, GBP/JPY and other/JPY pairs when Long USD/CHF, GBP/CHF and other/CHF pairs when Long .You should be always able to check the swap rates table with your Forex broker. If you don’t know what swaps are awaiting for you after 5pm each day, please don’t tell me you’re a serious trader.

All you need to do is to buy a currency with a high interest rate against the currency with a low interest rate. Popular currencies with high interest rate are: USD (not the case with recent economic situation), GBP, AUD and NZD. Popular currencies with low interest rate are: CHF and JPY.

Some pairs may change their positive interest earning features in the long run as country governments cut or raise interest rates, but overall the base list remains the same.

I’ve seen and you’ll see Forex brokers, who don’t care about those interest rate rules. What would be better than making all Forex rollover interest negative? Right?

“…Alright, let’s leave one or two pairs with a positive rollover for curious traders, but make everything else negative” — a simple trick used by a broker. As a result — traders are discouraged to hold positions past 17:00pm, the rollover time. Holding positions open for many days becomes expensive. What to do then? Avoid rollover and trade more frequently, may be..? Well, good choice ;), that’s what brokers aim for in the first place..!

Every trader may easily find what currency pairs should have a positive interest.

If you buy a currency pair where the base currency has a higher interest rate than the quote currency, then you’ll earn positive interest; if it is the other way around, you’ll pay interest. For example, if you buy GBPJPY and the interbank interest rates in UK are higher than in Japan, then a rollover should be positive by the end of the day and your broker should pay you the interest. But, say, if the interest rates in Japan were higher than in UK, then you’ll pay a rollover fee to your broker when you’re Long on GBP/JPY.

The only thing left to do is to learn what interest rates for currencies are now.

Let’s take an example:

If the interest rate for EUR now is 3.25%, and for USD the rate is 1.0%, this means that when you Buy EUR/USD you are going to earn interest (positive rollover), if you are to Sell EUR/USD you’ll pay interest (negative rollover).

Example:

If to calculate the interest for holding a Buy position on EUR/USD:

when buying EUR you earn 3.25% when selling USD you pay 1.0%

Net total is 3.25% - 1.0% = 2.25% interest earned.

Simple, right?

Now, you can check the latest interest rates, define currency pairs that collect positive interest and compare results against your Forex broker rollover fees…

By now, my friend, you already know that there are spreads to pay for entering a trade and there are rollovers to pay (sometimes to earn, thanks God… oh, well…) for holding a trade.

What you probably never thought of, or never experienced due to the lack of experience, hm, is that this Rollover thing is way much more nastier and costly than you can imagine. Where and How?

The truth is, the system of currency trading is built such way that we, retail traders, are slaves of constant fees as long as we trade: we pay the spread to enter a trade, and then if we hold it for a day, we pay a rollover on top (more of less we can treat it as another spread), and later the next day if we hold on to a trade, we pay another rollover (”spread”) and so on. The grim reality of all this costly trading is that long term investors (usually the smartest guys with a long term outlook at the currency trends) are actually put in the most disadvantageous position, where their fat brokers keep on charging them rollovers day after day as the trades kept open.

Want an example? Let’s laugh (or cry) together about my trades: I have a trade running for over 1.5 months now on AUDUSD. The trade sits in profit since opening, but it is a long term goal, and it’s not yet the time to close it. Everyday I pay a rollover on it (I mean, come on, I’ve paid the spread already, but it’s another everyday “spread” I’m paying to my broker… what a rip off! Really…) Yeah, let me boast about my profits so far: it’s $1960 in floating income and already -$532 in rollover charges, which leaves we about $1350 to cheer about.

Well, another trade is a bit better, check it out for yourself:

… And this will be with everyone who dares to hold a long term trade with a negative swap/rollover. Forex brokers are simply feeding on us everywhere they can! On the other hand, that’s the rules we accepted from brokers, right? So it is silly to whine now. I should repeat, that’s the rules we accepted! I accepted it as well :(

Brokers charge and pay disproportionate swaps based on the gap between short-term interest rates associated with currencies pairs set by central banks. This gap is not fixed; if the broker spends the swap from the customer, it will charge more than needed and if the broker pays the swap, it will pay less than needed. When the gap is small, the customer pays the swap both ways; it will not matter if one is long or short on the pair.

Can you make a conclusion from this, I hope you can. If you ever to hold a long term trade, consider opening only those where you’ll get a positive swap - it is better that way, trust me ;) Or, there is another way around - seek for a broker with no-swap accounts. The number of such brokers is growing, basically due to increasing popularity of trading in the Muslim world, where the Sharia laws prohibit swaps (extra rewards). So, Forex brokers now have this new no-swap technology working, and you can join in regardless your religion (depends on a broker, of course).