One of the features of the Forex market is that you are able to leverage trades to a high degree. For example, whilst you may only have $500 to invest in the prop firm markets, you will be able to trade up to 200 or even 400 times this amount, thanks to the power of leverage. Taking a $500 account size with 400:1 leverage, you will be able to trade up to $200,000 worth of currency at any one time.
However, for this to be possible, you need to borrow money from somewhere. The $200,000 doesn’t simply appear from nowhere.
In addition to borrowing the money, you also have to pay to borrow it. This is considered to be the rollover cost or premium – and it is usually charged to your account at the end of each business day.
Rollover Costs as Expenses
Rollover costs can accumulate to be quite expensive in the long run. This is especially the case for traders who hold positions for a longer term – i.e. more than a month. If a trade, for example, is held for 45 days before it is closed out, it will accumulate 45 days worth of rollover charge. At $2 to $3 per day – depending on the position size, this presents quite a significant cost to a trader.
To work out the cost of rolling a position over to the next day, you need to look at two things:
Size of the position
Currency pair being traded
Both of these variables will cause the rollover amount to be different.
For example, if you have a position which is of $20,000 size, you will probably be paying only a few cents to roll it over. Contrast this to the position size of $200,000 or more above, and the cost of rolling over becomes significantly more.
Additionally, the currency pair you are trading matter to a great extent. When calculating rollover amounts, the difference between the official cash rates in both correspondent countries is taken in to account.
I.e. if you are trading the EUR/USD, the official cash rate in the Eurozone will be compared to the official cash rate in America – and the difference will represent the rollover amount. Hence, if you choose a currency pair with a very small difference between official country cash rates, you are able to minimize the rollover cost on a long term trade.
Brokers without Rollover Costs
Unfortunately, because of the cost to brokers of providing additional leverage to you to use in the Forex markets, there is no such thing as a broker which doesn’t charge rollover interest. This would be like trying to find a bank which didn’t charge any interest on a loan – it is simply not ever going to happen because it would generate a loss for the lender.
