Glowing Overnight Positions Trading Strategies to Know

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Glowing Overnight Positions Trading Strategies to Know

day trading overnight position

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. Instead, they are not good for day traders, for a number of reasons that we will see later in the article.

In this article, we’ll look at overnight trades in general, 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 positions is weekend positions. This refers to trades that are not closed on Friday when global markets close.

Overnight positions for day traders, swing traders, investors

There are three primary types of people in the financial market: day traders, swing traders, and investors.

Day traders focus on opening short-term trades and ensure that they close them before the end of the day. A good example of day traders are scalpers who open and close trades within a few minutes.

A rule of day trading is never to leave a position overnight because of the potential risks that may come up. In some cases, day traders refuse to close their trades hoping that a rally will continue or that a reversal will happen.

Swing traders are thematic people who buy and sell assets within a few days. These people aim to identify opportunities like short-term trends and then follow them. As a result, these ones are usually open to hold their positions overnight.

Finally, we have investors, also known as position traders. These ones buy assets and then hold them for weeks, months, or even years.

A good example of this is Warren Buffett, the head of Berkshire Hathaway. Since these ones have a long-term horizon, they are not concerned about holding their positions overnight.

The issue of overnight positions applies to all financial assets like stocks, cryptocurrencies, forex and commodities.

A unique thing about stocks is that they are usually closed for hours after the extended session ends. As such, it is common for them to have gaps, especially when there is a major event or news.

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 hypothesize 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 on 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.

Additionally, there is the risk of not having a good night sleep as you keep worrying about these positions.

The situation worsens when something major happens before you go to sleep. For example, a company can publish a bad earnings report, fire its senior management, or issue a profit warning.

Further, there is the issue of market sentiment, which is defined as the overall attitude or feeling about the market from investors.

The two main types of sentiment are fear and greed. Fear happens when investors believe that something bad is about to happen while greed is when they are enthusiastic about the market. 

Stocks tend to rally when there is greed and sink when investors are fearful. Therefore, there is a risk that the sentiment will change when the market is closed, leading to big swings in the following day.

In forex and crypto, you can act fast since the market is open on a 24-hour basis.

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 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 predetermined 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.

How to manage overnight positions

At times, it will become necessary for you to have open positions in the overnight session, especially when you are a swing or position trader. In this case, there are a few things you need to do.

Risk management

The most important thing here is risk management, which we define as the process of reducing your risk exposure while maximizing returns. There are a number of risk management approaches you can do here. 

First, always have a trailing stop-loss or a normal one. A stop-loss is a tool that automatically stops your trade when it tests a certain level. This stop should be placed at the price where you are comfortable losing money and should be based on your risk-reward approach.

Second, ensure that your account is not severely exposed to the trade. In this, make sure that your position sizing is good. Doing this will ensure that you can stomach any loss that happens during that period.

Third, look at the assets you are holding and their correlation. Ideally, if you are long Apple and Microsoft, chances are that their short-term moves will be identical. Therefore, if they both retreat, there is a likelihood that your losses will intensify. 

Understand global macro events

The other thing you need to do is to have a good understanding of the global macro events because of their impact on key assets like stocks, commodities, bonds, ETFs, and currency pairs like the EUR/USD and EUR/CHF. 

The world is more connected today than it was a few years ago. As a result, what happens in Asia has an impact on the United States and Europe. The action of the Bank of Japan could impact US equities.

Therefore, if you leave your trades open overnight in the US, you should be aware of what will happen in Asia. For example, economic data from China or actions by the BoJ could move US stocks.

Consider your emotions

Another thing is that you need to consider your emotions. As we have explained before, your emotions are an important part of day trading and investing. If you can’t manage them well, there is a high possibility that you will make decisions in haste and lose money.

If you have an open position overnight and things are not going well, there is a likelihood that you will not be at peace.

Therefore, in this case, you should focus on what you can and cannot change. If you make a big loss overnight, ensure that you focus on the next trades and learn from the mistake.

Consider rollover interest

The other important thing to have in mind is known as the rollover interest, which is paid in the forex market.

Brokers pay this money from interest rate differentials between what two currencies pay. In most cases, rollover payments or swaps are paid at 5pm ET.

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.

External useful resources

  • Adapting to Overnight Shifts: 5 Common Mistakes and How to Avoid Them – Minority Nurse
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