Remember that Forex is a leveraged instrument? This means that your broker only needs you to put a fraction of the total trading amount. The remainder will be loaned to you via the broker. As with any loan from a financial institution, there is a cost to that.
What is this cost? When do you pay? Let’s explore.
Background Of Forex
From the 1st article, you have learnt that the currency market is decentralized; there is no exchange to regulate the trading activities. It is considered “Over-The-Counter (OTC)” or an “Interbank” market as the entire market is run electronically, within a network of banks.
The Forex market is also open 24 hours for 6 days a week. It is only closed on Sunday.
#1 Carrying Charge (Cost Of Borrowing)
Most currency traders prefer to day trade currencies so as to avoid incurring this carrying charge (aka cost of borrowing). You can also do so by closing your positions before 5pm EST.
The fee for an overnight position differs from broker to broker, but it is very competitive.
#2 Rollover Rate
As currencies are traded in pairs (think EUR/USD, AUD/USD, USD/JPY etc), you are essentially buying one currency AND selling another.
With interest rates at play, you GAIN interest on the currency that you went Long (bought) while you PAY interest on the currency that you shorted (sell).
Using EURUSD as an example:
From the graphs above (taken in 2020), the interest rate in the Euro zone is 0% while the interest rate in USA is 0.25%.
If you had bought EUR/USD (Long EUR and Short USD) and held your position past 5pm EST, you will be paid a net interest rate of -0.25% (0% on your EUR and -0.25% for USD). You pay 0.25% of interest.
Should You Focus On Interest Rates?
Are you thinking of making money from the difference in interest rates? The main aim of trading currencies is to profit from the price movement. That’s also where the bulk of your profits will come from. Keep your eyes focused on the big prize; treat the interest gained as a bonus.
Conclusion
Forex is a leveraged instrument where you just need to put up a fraction of your trade size. This brings about a couple of fees and possibly earning some interest along the way.
Keep your eyes on the main goal of profiting from price movements.
Here’s What You Can Do To Improve Your Trading Right Now:
#1 Join us in our Facebook Group and share your questions as we learn and grow.
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See you around!
