Many new Forex traders aren’t aware that whenever you’re holding an overnight position an adjustment of the position’s opening price is made. This process is known a Tom-Next (tomorrow next day). Since the majority of transactions made in the Forex market are speculative in nature, where the traders don’t want to take physical delivery of the currency traded, they engage a Tom-next. A Tom-next doesn’t apply if the trader closes the position the same day before 17:00 EST because there is no delivery involved.
- How does Forex trading work?
- Developing a Trading Plan
- Long-term Trading Strategy with Open Interest
Tom-next is a very important process for long-term traders who hold their positions for more than a day, but don’t want to take delivery of the currency. This means that the trade is closed at the daily close exchange rate and re-opened the following day at the opening exchange rate. What this means for you, is that your forex broker will roll over or swap your position for a new contract which begins the next day, and the end result would be in an adjustment, up or down, to the opening price of your position.
This is the reason why you’ll notice a small difference in the opening price of your trades from one day to another. The interest rate differentials determine whether your account will be credited or debited during the rollover process. If you’re long with a currency with a higher interest rate then your account will be credited with interest payments, while if you’re long with a currency with a lower interest rate then your account will be debited with the interest payments. Usually, delivery is due two days after the transaction has been made.
How to calculate the Tom-Next
There are several factors that are taken into consideration when calculating the Tom-next rate, including the closing level of the previous position plus or minus an adjustment for interest. The interest payment credited or debited to your account is based on “Swap Points” taken from a Tier-1 bank, plus an interest on your unrealized profit or loss.
Let’s assume that you’re long USD/JPY at rollover, with an average entry price of 115.00 and you decide to hold your position. The quote for the Tom-next swap points taken from a Tier-1 bank is 0.020 – 0.015. At rollover the broker sells and buys USD and at the same time buys and sells JPY. The end result would be that you will get the bid rate of 0.015 in your favor. Correspondingly, the average price of your position will decrease by the number of Tom-next swap points. The new adjusted price of your position will be 115.00-0.015= 114.895.
It’s worth noting that rollovers that happen on Wednesdays will experience an extra two days worth of interest that will be credited or debited to your account in order to compensate for the weekends when the banks are closed.