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    What Happens When You Leave Your Trade Overnight? | KOL Analysis•Jay Tun

    Abstract:In the 5th instalment of the Forex series, let us explore what would happen if we hold our positions over a few days while waiting for it to hit our target levels.
    Jay

      In the 5th instalment of the Forex series, let us explore what would happen if we hold our positions over a few days while waiting for it to hit our target levels.

      What Happens When You Leave Your Trade Overnight?

      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? Lets explore.

      Background Of Forex

    image.png

      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 Sundays.

      #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:

    image.png
    image.png

      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. Thats also where the bulk of your profits will come from. The carry interest received for holding a position overnight is a bonus but that should not be your goal.

      Keep your eyes focused on the price action; 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. Plan your trades and do your due diligence. Next session we will look at when is a good time to day trade within the day and the specifics of the Asian session.

      What You Need To Do Now:

      #1 Share a chart with this pattern on our Facebook Group as we support one another

      #2 Get market updates delivered to you via Telegram

      #3 Head over to our FREE Stock and Forex trading courses to find out how I screen for potential trades

      See you around!

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