Tom-Next is an abbreviation for “Tomorrow-Next Day,” a short-term forex trade that enables traders to buy and sell a currency simultaneously on two separate business days: Tomorrow the next day.
The purpose of
Tom-Next is to prevent traders from having to accept physical delivery of currency while still being able to maintain their FX positions overnight.
As with commodities, Forex trading often results in traders withdrawing the assets they are trading.
Tom-Next trading came about because most currency traders had no intention of taking currency delivery and therefore required their positions to be “rolled over” on a daily basis.
In Forex trading, the expected delivery date is two days after any trade and is called the Spot Date, but tomorrow’s next trade can be used to extend the trade beyond that date.
This sync trade is a FX swap trade where traders will be charged a fee or earn a premium depending on the currency they hold.
Tom-Next does not accept delivery of the currencies they trade, but instead allows positions to be extended, where the trader’s Forex broker exchanges any overnight position for an equivalent contract starting the next day.
When
is calculated, the difference between the two contracts is tomorrow’s adjustment rate .
Tom-Next is calculated by adjusting the closing level of your open positions with the interest rate, then you will receive an interest payment, but if you buy a currency with a lower interest rate, you will need to pay interest.
This payment is also known as the “carrying cost”.
Tom – next example
Suppose you trade EUR/USD by buying €100,000 and selling USD at 1.1266.
To maintain your position beyond the expected delivery date, you need to sell €100,000 on tomorrow’s date and buy it back at the new spot price.
The current price for your EUR/USD position is 1.1278/1.1279:
This means that the price to sell is 1.2278 and the price to buy is 1.1279.
However, the new spot rate is higher at 1.12795/1.12805.
To roll over, you could sell at 1.1278 and buy back at 1.12805, effectively paying 2.5 pips.
In this example, we would say The next interest rate is 0.5/2.5.
Since a 100,000 EUR/USD trade is equivalent to $10 per pip, rolling this position in the market would cost 2.5 x $10 = $25 (plus a small administrative fee).
If you want to learn more foreign exchange trading knowledge, please click: Trading Education.
