What is a Tom-Next Adjustment?
Your Forex broker will make a change to a position’s opening price whenever you hold a trade open overnight. This is a Tom-Next adjustment, short for tomorrow-next day.
Tom-next is important for longer-term traders who hold their positions for more than a day and don’t want to take delivery of the currency. In order to the delivery of currency to be averted, the broker automatically closes the trade at the close exchange rate and reopens it the following day at the open exchange rate, which usually results in a Tom-next.
How does it work?
Your broker will roll over, or swap, your position for a new contract which begins the next day. The end result would be an adjustment, up or down, to the opening price of your next day position. This is why you’ll notice a small difference in the opening price of your trades from one day to another.
During the rollover process, your broker will either debit or credit your trading account based on the interest rate change. If you are long with a currency with a higher interest rate then the broker will credit your account with interest payments. But, if you are long with a currency with a lower interest rate then your broker will take interest payments from your account. Usually, delivery is due two days after the transaction was made.
A Tom-next doesn’t apply if the trader closes the position the same day before 17:00 EST because there is no overnight delivery involved.
How do you calculate it?
Tom-next is calculated on the closing level of the previous position, and the change in interest. Swap Points, taken from a Tier-1 bank, plus an interest on your unrealized profit or loss, make up the change you will see on your account.
Rollovers that happen on Wednesdays will experience an extra two days worth of interest to compensate for the weekends when the banks are closed. Your broker will automatically credit or debit your account.
Let’s assume that you’re long USD/JPY at rollover, with an average entry price of 115.00. At this point, you decide to hold your position, and the quote for the Tom-next swap points taken from the bank is 0.020 – 0.015.
At rollover, the broker sells and buys USD, while at the same time buys and sells JPY. The end result is that you get a bid rate of 0.015 in your favour. At the same time, 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.