A Guide to Overnight Positions in Trading

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Overnight positions refer to those trades that have not been liquidated or closed by the end of a trading day. These positions are very common among swing traders, whose goal is to have ongoing trades for a few days.

They are also common among long-term traders who open trades and leave them intact for several weeks or months. In this article, we’ll look at overnight trades, the risks involved, and how to mitigate them.

What is an overnight position?

As the name suggests, an overnight position refers to a trade that starts during the day and one that you have not closed by the time you go to sleep. Many day traders and scalpers try as much as possible to not have these overnight positions because they don’t have control for what happens when they are not there.

For stocks, an overnight position means that you bought or shorted a company and continued to hold it after the market closed. This means that nothing will happen to your stock when you are not there.

However, for foreign exchange, it means that your open trade will continue trading overnight because the market usually operates for 24-hours per day.

Another popular term similar to overnight position is weekend positions. This refers to trades that are not closed on Friday when global markets close.

Why leave trades open overnight

Traders usually leave their trades open overnight for several reasons.

Swing traders leave them open because it is part of their strategy. For example, if a company’s stock is trading at $25, they could hypothesis that the stock will rise to $35 in the next three days based on the chart set-ups.

Because of this conviction, they will have no need to exit it before the market ends.

Some traders leave their trades open overnight because they are profitable. For example, if you bought a stock at $10 and it rises to $12 by the end of the day, you can leave it open hoping that the trend will continue.

Further, traders leave their loss-making trades overnight hoping that they will reverse. For example, if the stock you bought at $10 dropped to $9, you can hope that it will reverse when the market opens the following day.

Finally, many investors leave their trades open overnight because they are never concerned about the short-term swings in the market. They are usually focused about the long-term prospects of a company.

Risks of leaving trades open overnight

There are several key risks of leaving trades open overnight. First, in case of the forex market, some events could trigger a major move when you are not there.

For example, in 2015, when the Swiss National Bank (SNB) removed the peg on the Swiss franc, the currency rose sharply against other currencies. That led to a short squeeze among traders who were short the currency.

In fact, some prominent brokers made headlines when they went bankrupt after the event.

Second, in the case of stocks, there is the risk of major activities in the extended hours and premarket. For example, a company can release its earnings during this time. Also, a merger and acquisition (M&A) deal can also be announced overnight.

When this happens, the stock could open either significantly higher or lower. In fact, it is a well-known fact that stocks usually experience a lot of movements shortly after the market opens and before the close.

Third, there are costs associated with holding assets overnight. Some forex companies charge swap fees. While these costs are usually low, they can add-up when held up for several days.

Reducing risks in overnight positions

As mentioned above, there are several risks associated with holding positions overnight. Therefore, as a trader, you need to know how to mitigate some of these risks.

  1. First, if you are a strict day trader, you should avoid leaving trades open overnight unless when totally necessary.
  2. Second, you should try and reduce the size of your trades when leaving them open overnight. If the trade is already profitable, you can take some of these profits and leave a part of the trade active.
  3. Third, we recommend that you have a stop-loss for all trades you have online. A stop-loss is a tool that stops your trade immediately it reaches a pre-determined level. For example, if you bought a stock at $10, you can have a stop-loss at $8. In this case, the trade will stop automatically when it reaches this level.
  4. Fourth, a trailing stop-loss is even better because it moves with the price. For example, if the trade above rose to $12 and then reverses, the initial profit will be captured.
  5. Fifth, in case of stocks, avoid leaving short-trades open overnight. That’s because, in this era of meme stocks, a short-squeeze could happen in overnight trading. A short-squeeze is a period when a stock rises, pushing short-sellers under intense pressure.
  6. Finally, avoid leaving overleveraged trades open overnight. Leverage refers to trades with borrowed money.

Final thoughts

In this article, we have looked at what an overnight position is and the risks that are involved. As a day trader or scalper, you should try to avoid such risks by using the guidelines that we have mentioned above.

In summary, you should avoid them, have a stop-loss, reduce your leverage, and avoid short stocks.

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