Every day at about 5 p.m. EST, the currency market rolls over.
You probably won’t see much of a difference (if any) in your trades. It simply means that any trades you’re currently holding are carried over to the following day.
OK. But what does that “mean”?
Swap—or rollover—is the interest that you either earn or pay for holding onto a trade overnight. (This is sometimes also referred to as a “carry.”)
This is typically a small amount of money and doesn’t mean a lot or factor much into your trading unless you’re holding onto something for a very long time. You can find this number in the terminal window of your open trade.
Generally, you won’t earn or pay anything if you don’t hold that trade through 5 p.m. EST—or whatever time your broker uses. But some dealers will charge or pay interest on a minute-by-minute basis.
So, how do your trades accumulate interest overnight?
Every central bank around the world sets an interest rate. Let’s say the Reserve Bank of Australia sets an interest rate of 6%, and the Bank of Japan set an interest rate of 0.5%. You decide to buy the Australian dollar / Japanese yen pairing.
If you hold those trades overnight, will you earn interest because the Australian interest rate is higher.
But let’s say you’re short the Australian dollar and you’re buying Japanese yen. In that case, if you hold those trades overnight, you’re going to pay interest.
Determining the total interest on your overnight trades is a simple matter of calculating of your swaps.
Free money? Sometimes. Worth watching? Always.
You’ve probably heard that famous Benjamin Graham quote: “In the short run, the market is a voting machine but in the long run, it is a weighing machine.” Which is basically just another way of saying that short-term movements in the market are derived from mass hysteria. Sounds simple, but it’s actually a MAJOR force in the markets. Here’s how I think about it as a trader…