Reading forex rates

A market maker will usually quote a two-way market price – “two-way” meaning

a bid and an ask price–

• a bid is a price at which a market maker is willing to buy a currency (and at which the trader is willing to sell), while
• an ask is a price at which a market maker is willing to sell a currency (and at which the trader is willing to buy).

Here are some examples of currency quotes:

EUR/USD 1.3000 / 1.3003

USD/CHF 1.2236 / 1.2240

GBP/USD 1.9500 / 1.9504

The quote on the left-hand side is the bid, whereas the one on the right-hand side is the ask. As you can see, the ask is always higher than the bid, and the difference (which is called the spread) is where the market maker makes its money from. In the example of the EUR/USD quote above, the spread is 3 pips.

Understanding rollover

Forex transactions in the spot market are always due for settlement two business days later. So if a trader sells a certain quantity of a currency on, say, Monday, he or she is obligated to deliver that quantity of the currency onWednesday. However, in practice, when you buy and sell currencies in the spot market as a retail trader you don’t really take delivery of the actual currency. This is because you are likely to be trading on a leveraged trading account, which means you can get a loan from your forex broker for the amount that you are trading.

For example, if you want to buy or sell $100,000 worth of a currency, you may only need to pay $1000 for the deal if your broker allows a 1% margin. So to avoid taking actual delivery of the currency that you have bought or sold, most forex brokers will automatically roll over your positions to the next business day by closing your position and opening an identical one with a delivery date within the next two days.

Rollover is usually done on a daily basis at 5:00 pm New York time, and only affects those who hold their positions overnight.

During rollover, the broker pays or charges you whatever the interest rate differential is between the two currencies in the pair. So if you have bought (long) a particular currency, and that currency has a higher overnight interest rate than the counter currency, you will gain the difference. If you have sold (short) the currency with a higher overnight interest rate, then you will be charged the difference. The

broker also keeps a percentage of this rollover for itself, which is why the amount you receive will always be less than what you must pay for a given currency pair.

Most brokers also have a slightly strange way of dealing with the weekend rollover. Rather than charging you the 2 non-trading days of Saturday and Sunday on the night of Friday, they usually charge it on a Wednesday. This can be somewhat confusing for new traders who wonder why their rollover is so much higher on a Wednesday than on other days of the week.

Some brokers may also call the rollover payout or charge the “swap”, as a swap is the term used for an interest rate differential between two currencies over a given period of time.

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