Rollover (sometimes abbreviated to "roll") is an integral component of financial trading that extends an open position's settlement date by one trading day - typically forex, commodities or indices markets - without physically taking delivery of or taking delivery on said asset itself. It allows traders to hold onto positions overnight without physically making deliveries/take deliveries on assets such as forex or commodities without physically doing either one themselves.
When discussing forex market transactions, "rollover" refers to an extended settlement of an open position until the following trading day, typically by simultaneously closing and reopening trades at each end of each trading day to prevent physical delivery of currencies involved. Through rollover trading mechanisms such as rollover trading positions can remain open beyond market close allowing traders to earn or pay interest for those open positions held beyond closing time.
Rollover interest, also referred to as swap or overnight interest, refers to the cost or gain associated with holding positions overnight. Calculations for rollover interest consider differences in interest rates across currencies traded; when selling higher yielding currencies than buying them may incur positive rollover interest while conversely when holding lower interest currency positions a trader could incur negative rollover interest costs.
Rollover isn't limited to forex markets - it also applies in commodity and index markets. When holding futures contracts beyond their expiration dates, traders often resort to rolling them over as an effective strategy in order to prevent physical delivery of an underlying asset by closing these expiring contracts and simultaneously opening ones with later expiration dates - something similar happens with currency trading contracts as well.
It is essential that traders understand that rollover includes costs and considerations which could alter their trading strategy significantly, such as broker fees, spreads, potential negative rollover interest as well as market liquidity considerations (central bank decisions/events affecting interest rates etc).
For successful rollover management, traders need to remain aware of upcoming rollover dates, interest rate differentials and market conditions that might impact costs associated with rollover. Furthermore, it's crucial that traders evaluate any potential impact from rollover on overall trade profitability as part of risk management strategies, taking these costs into consideration as an integral component.
Rollover is an integral aspect of financial trading that allows traders to hold positions overnight without physical delivery. From forex, commodities, or indices markets - understanding rollover works and its costs is vital in successfully navigating any market effectively - by being informed and efficiently managing rollover, traders can make more informed decisions while optimizing their trading strategies.