Trades have not been liquidated or closed before the conclusion of a trading day are referred to as overnight positions. Swing traders, whose objective is to have ongoing trades for a few days, often take these positions.
They are also typical of long-term traders, who initiate trades and hold them for several weeks or months. This post will examine overnight transactions, their risks, and potential solutions.
However, because the foreign currency market often operates around the clock, it implies that your open trade will continue to trade during the night.
Weekend occupations are another common phrase used to describe jobs that are not overnight. For example, when the world’s markets close on Friday, this refers to still open trades.
Why leave trades open overnight
Rollover interest may be applied to open positions overnight. The amount credited or charged for forex instruments depends on the rate differences between the two exchanged currencies and the position (long or short) taken. The amount credited or charged in the case of stocks and stock indices depends on whether a short or long position has been taken.
Please be aware that only cash instruments are subject to rollover interest. There is no overnight fee for futures goods because they have an expiration date.
Risks of leaving trades overnight
The main hazards of leaving deals open overnight are several. First, even if you are not present, certain events in the currency market could cause a significant shift.
For instance, the Swiss franc significantly increased in value against other currencies in 2015 after the Swiss National Bank (SNB) lifted the currency’s peg. As a result, short traders’ money experienced a short squeeze.
It made headlines when some well-known brokers filed for bankruptcy after the incident.
When it occurs, the stock may open noticeably higher or lower. It is well-known that equities typically fluctuate a lot right after the market opens and right before it closes. Overnight asset storage entails expenses. Several FX firms levy swap fees. Even though these expenses are typically small, they can build up if delayed for a long time.
Reducing Risks in Overnight Positions
To begin with, if you strictly follow the day trading rule, you should avoid leaving trades open overnight unless required.
Second, when leaving transactions open overnight, you should lower the number of your trades. You can take some of the gains from the trade if it is already profitable while keeping a portion of the transaction open.
Third, trailing stop-loss is much better because it changes with the price. For instance, if the abovementioned transaction increased to $12 before turning around, the initial profit would be kept.
Finally, avoid leaving overnight open positions in leveraged transactions. Leverage describes transactions involving borrowed funds.
OVERVIEW
A trader who retains a position overnight has a long or short position that was not closed out during the regular trading day and must hold the position over the night and into the new trading day. As outside events can affect the market and the trader cannot respond immediately to these developments when the market is closed, this sort of trading is considered particularly dangerous.
Risk management, financial system stability, capital inflow, and outflow control are all possible benefits of overnight position restrictions.
Forex traders can calculate rollover payments and manage margin requirements using overnight positions.
