By: Charley Warady
Long term trading in Forex is, for all practical purposes, limited to one day. If you want to extend a trade to more than one day, the practice of Forex rollovers comes into play. The trading of Forex is not like stocks or commodity trading in the normal sense of practice. With commodities, you can hang onto a trade until its delivery date, which may be months in the future. With stocks you can hold onto a trade practically indefinitely. With currency pairs, the trader has to request Forex rollovers on a daily basis.
As far as what the individual Forex trader has to do to hold onto his currency pair trade for more than one day, he doesn't have to do much. As a matter of fact, in most cases he doesn't have to do anything. The broker handles the logistics of Forex rollovers and it's done on a daily basis. The trader may or may not be aware of it, but for tax purposes, he should keep track.
Buying and Selling
The whole concept of Forex rollovers may sound intimidating at first, but it's really not that complicated. Put simply, the way the Forex market works is that there aren't any trades that are literally carried over night. If the Forex trader himself doesn't close out a position, the broker, in essence, closes out the position for him.
No need to worry. The trade doesn't disappear, nor does a buying or selling action occur without the trader's permission. The Forex broker simply takes the other side of the open trade at the close of trading. Then, at the beginning of trading the next day, the broker resubmits the trade. As far as the trader is concerned, the open position has remained open. Only the details were taken into account. Forex rollovers happen all the time.
Profits and Losses
The Forex trader needs to be aware, however, as to the extent of the impact that the Forex rollovers have on his profit and losses. In other words, whether the trader makes the trade, or the broker makes the trade, at some point a trade was made and there was a profit or loss established for the trade on each day for each trade. If there was a profit made by the broker to institute the rollover, then somebody has to pay taxes for that net gain. As far as the government is concerned, it doesn't care about Forex rollovers. It cares about capital gains. Therefore, a trader has to keep track of the money involved at the beginning of each day with his open positions. The Forex brokers will always provide this information and it is a common practice.
This process must be tracked for each open position, because as far as any Forex broker is concerned, there is no such thing as an open trade. At the end of each trading day, each of their traders maintains a flat position, only to continue a previous trade on the opening of the following day. That's the way the business is run.
Best to Stay Flat
The common wisdom among Forex traders, both novice and experienced, is to simply day trade. Forex rollovers have their place, but the market can become complicated enough without adding to its complications. It is best for the trader to go away from his computer terminal at the end of the day knowing exactly how much he made or lost from all