What is Tom-Next?

Tom-next, short for ‘tomorrow-next day,’ is a specialized term in forex trading that refers to a short-term transaction allowing traders to buy and sell a currency over two consecutive business days: tomorrow and the next day. This mechanism enables traders to avoid taking physical delivery of the currency while still keeping their forex positions open overnight.

Why is Tom-Next Important in Forex Trading?

In the forex market, trades typically result in the physical delivery of the traded currency. Normally, this delivery is expected two days after the transaction, known as the spot date. However, many traders prefer to keep their positions open for longer periods without having to deal with the complexities of taking delivery. This is where tom-next becomes invaluable. It allows traders to extend their trades beyond the spot date without the need for physical delivery, thus providing more flexibility and convenience.

How Does Tom-Next Work?

Instead of accepting delivery of the currency they have traded, tom-next allows traders to extend their position. The provider swaps any overnight positions for an equivalent contract that starts the next day. The difference between these two contracts is known as the tom-next adjustment rate. This rate is used to calculate the overnight funding charge on a forex position, which traders must pay if they wish to keep their forex trade open for longer than a single day.

How is the Tom-Next Adjustment Rate Calculated?

The tom-next adjustment rate is calculated by adjusting the closing level of an open position with the interest rate of the currencies involved. These rates can change daily based on the underlying market price. For example, if you are buying a currency with a higher interest rate, you would receive an interest payment. Conversely, if you are buying a currency with a lower interest rate, you would have to pay interest. This payment is also known as the cost of carry.

Can You Provide an Example of Tom-Next?

Let’s dive into an example to make the concept clearer. Suppose you decide to trade the EUR/USD pair. You open a position to buy €100,000 and sell USD at a price of 1.1366. To keep your position open beyond the expected delivery date, you would need to sell your €100,000 the following day (tomorrow’s date) and then buy it back at the new spot price.

Assume the current price of your EUR/USD position is 1.1378 to sell and 1.1379 to buy. The new spot rate is one point higher at 1.13795 to sell and 1.13805 to buy. To roll your position, you would be selling at 1.1378 and then buying back at 1.13805, effectively paying 2.5 points.

In this example, the tom-next rate is 0.5/2.5. Given that a €100,000 EUR/USD trade is equivalent to $10 per point, rolling this position would cost 2.5 x $10 = $25, plus a small administrative fee.

What are the Benefits and Drawbacks of Using Tom-Next?

The primary benefit of using tom-next is the flexibility it offers to traders. It allows them to keep their positions open without the need for physical delivery of the currency, thus avoiding logistical complexities. Additionally, traders can take advantage of favorable interest rate differentials to either earn interest or minimize costs.

However, there are some drawbacks. The cost of carry can add up, especially if you are holding a position for an extended period. Moreover, the interest rates can fluctuate daily, adding an element of unpredictability to the cost of keeping a position open overnight.

What Should New Traders Know About Tom-Next?

For those new to forex trading, understanding tom-next is crucial for effective trading strategies. It offers a way to manage positions without the complications of currency delivery. However, it’s essential to be aware of the associated costs, such as the tom-next adjustment rate and the cost of carry. By keeping these factors in mind, new traders can make more informed decisions and better manage their forex trades.

Where Can You Learn More About Forex Trading Fees and Charges?

To get a more comprehensive understanding of forex trading fees and charges, including tom-next rates, visit the help and support section of your trading platform. This resource can provide detailed information on various fees, helping you make well-informed trading decisions.

Conclusion

Tom-next is a valuable tool in the forex trading arsenal, offering flexibility and convenience by allowing traders to extend their positions without taking physical delivery of the currency. By understanding how tom-next works, how to calculate the adjustment rate, and the benefits and drawbacks, traders can better navigate the complexities of the forex market. For new traders, grasping this concept can be a significant step toward successful trading.