What is a CFD Rollover, and How Can It Impact Your Trading?

CFDs (Contracts for Difference) are a versatile tool that lets you trade on the price movements of financial assets without actually owning them. But as you gain more experience in the CFD world, you’ll probably hear about rollovers, and they might sound a bit intimidating at first. Don’t worry—that’s exactly what we’re here to simplify.

In this guide, we’ll walk you through what a CFD rollover is, why it matters, and how to navigate it like a pro.

The Basics of CFDs

Before we get into rollovers, let’s quickly recap CFDs.

Think of CFDs (contracts for difference) as a contract between you and your broker. The deal? You profit (or lose) based on the difference in the asset’s price from when you opened the trade to when you closed it. It's a kind of derivative market where, instead of buying and holding an asset, you simply speculate on the price of an asset. Sounds straightforward, right?

But here’s the catch: some CFDs, especially those based on futures contracts (like oil or commodities), have expiration dates. That’s where rollovers come in.

What’s a CFD Rollover?

A CFD rollover is when your broker shifts your position from an expiring contract to a new one. This process involves:

• Closing the expiring contract.
• Opening a new one with an adjusted price.
• Accounting for any price differences and costs along the way.

This means that a CFD rollover enables traders to shift an open CFD position from an expiring futures contract to the next available one. This process allows CFD positions to be maintained without the need for manual re-entry into the market.

Still with me? Great! Let’s look at why this is necessary.

Why Do Rollovers Happen?

So, why do CFD rollovers happen? Well, futures contracts (on which many CFDs are based) have a set lifespan. When they expire, they’re done. But as a trader, you might want to keep your position open longer. A CFD rollover lets you do just that, ensuring your trading journey isn’t cut short by contract deadlines.

Breaking Down the Rollover Process

When it’s time for a rollover, here’s what actually happens:

• Notification from Your Broker: Brokers like Switch Markets give you a heads-up before a rollover happens. This way, you’re never caught off guard.
• Price Adjustment: Once the rollover occurs, the price of the old contract and the new one won’t be the same. Your broker adjusts the rollover price to reflect this difference.
• Rollover Fee (or Credit): Depending on the price gap between the contracts, you’ll either pay a fee or get a credit. 

How Rollovers Impact Your Trading

Alright, let’s get real—rollovers can affect your trading. Here’s how:

• Cost Considerations: Rollovers might add a small cost to your trade. While it’s not a big deal for long-term traders, scalpers or day traders might want to keep an eye on these expenses. If you are not aware of the contract expiry date, you might be facing a significant loss.
• Strategy Tweaks: When the new contract kicks in, its price might be slightly different. If you’re working with tight stop-loss levels or aiming for small price movements, this shift could make a difference. As such, you must adjust your stop loss and take profit orders so they match the new price.
• Market Sentiment and Seasonality: Rollovers can also give you clues about the market and the commodity seasonality. Some assets, like Crude oil, often have a decreasing price based on future contracts, while other commodities, like Gold or Silver, often have increasing price rates. 

Examples of CFD Rollovers

To bring the concept of CFD rollovers to life, let’s explore two practical scenarios: one involving a Forex CFD and another using an Oil CFD. These examples will help you understand how rollovers are applied in different markets and what they mean for your trading.

1. Forex CFD Rollover

A forex CFD rollover normally refers to the fee a trader must pay for holding a position overnight. This is typically not the same ‘CFD rollover’ mentioned above since most brokerage firms follow FX spot prices and not futures contract prices. 

So, let’s say you’ve decided to go long on the EUR/USD currency pair because you expect the euro to strengthen against the US dollar. You open the position at a price of 1.1000 on a Monday, using leverage to amplify your exposure. Since Forex CFDs don’t have fixed expiration dates, they remain open until you choose to close them or until a margin call occurs. However, keeping a position open overnight comes with a cost—or sometimes a credit—depending on the interest rate differential between the currencies in the pair. This is known as a CFD rollover swap rate. 

At the end of each trading day, typically at 10 PM GMT, your broker calculates the rollover cost or credit. This is based on the difference between the eurozone’s interest rate and the US Federal Reserve’s rate, as well as the size of your position. 

For example, if the Euro has a higher interest rate than the Dollar, you might receive a small credit because you’re effectively holding a higher-yielding currency. Conversely, if the dollar has a higher rate, you’ll incur a fee for holding the position.

Let’s say by Wednesday night, you’ve accrued $15 in rollover fees, as the dollar’s interest rate is slightly higher than the euro’s. You decide to keep the trade open because your analysis shows strong potential for further euro appreciation. On Thursday, the EUR/USD pair surges, and you close your position at 1.1200. Despite the $15 rollover cost, you lock in a substantial profit, demonstrating how understanding and planning for rollover fees can help you navigate the Forex market effectively.

Visit this page to learn more about Switch Markets’ swap rates. 

2. Oil CFD Rollover

Now, let’s explore how rollovers work with a commodity CFD like Oil. Here, a CFD rollover refers to the broker rolling over your CFD contract to the next contract. 

You must remember that futures contracts have a set expiration date. For instance, crude oil has a future contract for every month of the year, as you can see here. 

So, suppose you’re trading a CFD on Crude Oil futures and have taken a short position, believing oil prices will fall. The contract you’re trading is based on the front-month crude oil futures contract, which expires at the end of the month. As the expiry date approaches, your broker notifies you that the position will be rolled over to the next contract unless you close it beforehand.

On the expiration date, the current contract is trading at $80 per barrel, but the next month’s contract is priced higher at $85 per barrel due to market expectations of increasing demand. Your broker automatically rolls over your position by closing the expiring contract at $80 and opening a new one at $85. Since you are short, the $5 difference works in your favor, and your account is credited to reflect this. However, the rollover also incurs a small spread fee for transitioning to the new contract, which your broker deducts.

After the rollover, your short position is now active at the new price of $85 per barrel. Over the next week, oil prices drop to $70 per barrel, and you close your trade, securing a significant profit. Despite the small spread fee associated with the rollover, you successfully captured the price movement and achieved your trading objective.

In these examples, rollovers allow traders to maintain their open positions even when the underlying contracts expire. For Forex CFDs, rollovers occur daily and reflect interest rate differentials. For commodity CFDs like Oil, rollovers involve transitioning to the next futures contract with potential adjustments for price differences.

Managing Rollovers Like a Pro

Rollovers in trading are a technical factor that may affect your trading, and as such, you must know how to manage rollovers so they won't affect your P&L. 

Here’s how you can handle rollovers like a seasoned trader:

• Stay Updated: Keep track of contract expiry dates. A good broker (looking at you, Switch Markets) will always notify you in advance.
• Factor in Costs: Rollovers come with fees or credits, so include these in your trading plan. They might be small, but over time, they add up.
• Set Alerts: Use your trading platform’s alert system to remind you of upcoming expirations. Most platforms make this super easy.
• Close Positions Before Rollovers (Optional): Some traders prefer to close their positions before a rollover to avoid any surprises. This is especially common for short-term strategies.

Final Thoughts

In sum, CFD rollovers might sound technical, but they’re just another part of the trading process. Once you understand how they work, they’re easy to manage.

Remember, trading is about staying informed and adapting. With brokers like Switch Markets offering clear communication and support, you can confidently navigate rollovers and keep your trading game strong.

So, the next time a rollover comes up, you’ll know exactly what’s happening and how to handle it.