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Tuesday, July 5, 2011

Rollovers in Forex

Tuesday, July 5, 2011
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Even though the mighty US dominates many markets, most of Spot Forex is still traded through London in Great Britain. So for our next description we shall use London time. Most deals in Forex are done as Spot deals. Spot deals are nearly always due for settlement two business days later. This is referred to as the value date or delivery date. On that date the counter parties theoretically take delivery of the currency they have sold or bought.

In Spot FX the majority of the time the end of the business day is 21:59 (London time). Any positions still open at this time are automatically rolled over to the next business day, which again finishes at 21:59.

This is necessary to avoid the actual delivery of the currency. As Spot FX is predominantly speculative most of the time the traders never wish to actually take delivery of the currency. They will instruct the brokerage to always rollover their position.

Many of the brokers nowadays do this automatically and it will be in their policies and procedures. The act of rolling the currency pair over is known as tom.next, which stands for tomorrow and the next day.

Just to go over this again, your broker will automatically rollover your position unless you instruct him that you actually want delivery of the currency. Another point noting is that most leveraged accounts are unable to actually deliver the currency as there is insufficient capital there to cover the transaction.

Remember that if you are trading on margin, you have in effect got a loan from your broker for the amount you are trading. If you had a 1 lot position you broker has advanced you the $100,000 even though you did not actually have $100,000. The broker will normally charge you the interest differential between the two currencies if you rollover your position. This normally only happens if you have rolled over the position and not if you open and close the position within the same business day.

To calculate the broker's interest he will normally close your position at the end of the business day and again reopen a new position almost simultaneously. You open a 1 lot ($100,000) EUR/USD position on Monday 15th at 11:00 at an exchange rate of 0.9950.

During the day the rate fluctuates and at 22:00 the rate is 0.9975. The broker closes your position and reopens a new position with a different value date. The new position was opened at 0.9976 - a 1 pip difference. The 1 pip deference reflects the difference in interest rates between the US Dollar and the Euro.

In our example your are long Euro and short US Dollar. As the US Dollar in the example has a higher interest rate than the Euro you pay the premium of 1 pip.

Now the good news. If you had the reverse position and you were short Euros and long US Dollars you would gain the interest differential of 1 pip. If the first named currency has an overnight interest rate lower than the second currency then you will pay that interest differential if you bought that currency. If the first named currency has a higher interest rate than the second currency then you will gain the interest differential.

To simplify the above. If you are long (bought) a particular currency and that currency has a higher overnight interest rate you will gain. If you are short (sold) the currency with a higher overnight interest rate then you will lose the difference.

I would like to emphasise here that although we are going a little in-depth to explain how all this works, your broker will calculate all this for you. The purpose of this article is just to give you an overview of how the forex market works.

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Friday, July 1, 2011

Forex Broker Guide

Friday, July 1, 2011
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Introduction

The following is a list of questions you may like to consider before opening an account. You can use this checklist to narrow down your selection of companies that fit your requirements. You may also wish to refer to the forex broker ratings page on this site to read about traders unique experiences with particular brokers.

Important Note to Traders: GoForex recommends you do not open an account with a U.S. based forex broker regulated by the CFTC and NFA, due to excessive and over-bearing regulation imposed on retail forex brokers including reduced leverage levels, the "no-hedging" rule and the FIFO (first-in, first-out) rule which affects the way you trade.

The following links will also give you some background information on U.S. FCM's (Futures Commission Merchants).

Selected Financial Data for FCM's
NFA Background Affiliation Status
1. Word of Mouth

What do other traders say about the broker? See Forex Broker Ratings & Forex Broker Reviews
What is their customer service like?
2. Customer Protection

Is the broker regulated?
What regulatory organisation are they registered with and what protections does it afford the client?
Are client funds protected against fraud?
Are client funds protected against bankruptcy?
3. Execution

What business model do they operate? i.e. Are they a Market Maker[?], ECN[?] or no-dealing desk broker[?]?
How fast is their order execution?
Are orders manually or automatically executed? [?]
What is the maximum trade size before you have to request a quote?
Are all clients trades offset?
4. Spread [?]

How small is the spread?
Is it fixed or variable?
5. Slippage [?]

How much slippage can be expected in normal and fast moving markets?
6. Margin [?]

What is the margin requirement? e.g. 0.25% margin = max 400:1 leverage [?]), 0.5% margin = max 200:1 leverage, 1% margin = max 100:1 leverage, 2% margin = max 50:1 leverage, etc.
Does the margin requirement change for different currency pairs or days of the week?
At what point does the broker issue a margin call?
Is required margin the same for standard and mini accounts? [?]
7. Commissions

Does the broker charge commissions? (Most market makers commissions are built into the spread)
8. Rollover Policy [?]

Is there a minimum margin requirement in order to earn rollover interest?
What are the swap rates like for going long or short in a particular currency pair?
Are there any other conditions for earning rollover interest?
9. Trading Platform

How intuitive and functional is it to use?
Are there many disconnections during trading hours?
How reliable is it during fast moving markets and news announcements?
How many different currency pairs are available to trade?
Does the broker offer an Application Programming Interface (API) to allow clients to automate their trading systems?
Does the broker offer any other special features? (e.g. One click dealing, trading from the chart, trailing stops, mobile trading etc.)
10. Trading Account

What is the minimum balance required to open an account?
What is the minimum trade size?
Can clients adjust the standard lot size traded? [?]
Can clients earn interest on the unused margin in their account?

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