- Two key concepts that traders need to comprehend are “roll over” and “spreads.”
- In this article, we will delve into the relationship between roll over and the widening of spreads
In the world of forex trading, understanding the various factors that influence market dynamics is crucial for making informed decisions.
Two key concepts that traders need to comprehend are “roll over” and “spreads.” In this article, we will delve into the relationship between roll over and the widening of spreads, explaining their significance and impact on forex trading.
Understanding Roll Over:
The roll over process occurs automatically at the end of each trading day, typically at 5:00 PM Eastern Standard Time (EST). At this time, the positions are closed and simultaneously reopened for the next trading day at a new exchange rate.
When a trader holds a position overnight, they are subject to the interest rate differential between the two currencies in the pair (also known as swap or overnight interest).
The interest rate differential is calculated based on the central bank rates of the respective countries. If a trader holds a position in a currency with a higher interest rate compared to the other currency in the pair, they will earn interest. Conversely, if the interest rate of the currency being held is lower, the trader will incur an interest cost. This interest adjustment is applied at the end of each trading day.
The Relationship between Roll Over and Spreads:
The relationship between roll over and spreads is interlinked. During periods of high market volatility or low liquidity, spreads tend to widen. This widening is a reflection of the market’s perception of increased risk and uncertainty. When spreads widen, the cost of executing a trade can also increase.
