Rollover!

Many traders and backers come to the currency market with an awareness of the best way to trade the stock market, and while a lot of this info has relevancy to fx trading one idea that doesn't exist for stock trading is that of rollover orders. The rollover is something that's critical for trading the spot currency market, and indeed the currency exchange market couldn't function the way that it does without this. When you're trading a physical commodity like oil on the commodity market, there's a superb possibility that you aren't interested by having enormous barrels of crude oil brought to your front door but instead you are trading or gambling on the cost of oil on the markets with the assumption that the price will decrease or increase. In the same way, when you get a signal on your price chart that you can purchase EUR / Bucks you are likely not especially interested in having a heap of EU Buck notes dropped at you, but instead you are betting that the value of the EU Buck will increase relative to the US buck and so your open position will gain in value. To ensure that you never need to take physical delivery of the currency you are trading, the rollover order comes into play and it is a credit or debit on your open position that's figured out as a factor of the interest rates on both of the currencies you are trading.

It is critical not to lose sight of the incontrovertible fact that in the currency exchange market you are literally trading money and money earns interest. If you had cash deposited in a high-interest account you would expect to earn interest, and if you borrowed cash for a loan you would expect to pay interest. In this same way, when you sell or buy a currency pair you may earn interest on the currency you are purchasing and you'll need to pay interest on the currency that you're selling. The way the rollover order is worked out has to do with the difference between the rates of the 2 currencies you are purchasing and selling. If you're purchasing the currency with the higher rate of interest you may earn from the interest rate rollover, and if you're selling the currency with the higher interest rate there'll be a reduction from your open position.

In this manner you can literally keep a currency exchange transaction open indefinitely while continuing to simply bet on the relative price of the 2 currencies to each other without ever needing to accept the particular physical currency as you might have to for a foreign-exchange exchange at the airfield or the reception desk of a hotel in a foreign country. If you understand this idea of the rate of interest rollover to keep a position open indefinitely, then you may have realized that profit potential exists if there's a large discrepancy between the IRs of the 2 currencies. If the currency you are purchasing has a rate significantly bigger than the one you're selling, the gains added to your open position might be important if you hold the position open for a number of days. Indeed this is so, and this is a technique called the carry trade where you purchase the currency with the higher interest rate and sell the currency with the lower rate and pocket the difference, not forgetting a move in the value of the 2 currencies in the other direction of your trade could cancel the profit earned.