What to know when day trading and holding positions open overnight
Overnight positions are in simple terms, any trade held open after the market close on any given day. Day traders open positions and usually close them before the market day ends as it carries less risk than holding a position open overnight. If you are considering trading overnight, you must evaluate your risk management.
If you are familiar with overnight trading, you will also be aware that you must pay a fee depending on your leverage if you are to keep a position open overnight (rollover interest rate). A trader may want to leave a position open to increase their profit or to recover a losing position in hopes that it will turn into a profitable trade the next day. However, there is not always the good scenario, as some of them might lose as well.
Day traders can reduce risk by setting up limitations on their trades such as stop-loss and take-profit orders. By placing limitations traders can be sure that a position will be closed at a certain point and reduce the risk of huge losses (especially when using leverage), or to take the profit at a point where they are happy. If as a trader, you opt to not use limitations, you most probably manually close your running orders at the point you see fit but this also can carry high risk if you are not actively watching your active trades.
How can you be more vigilant with your orders?
Close any losing trades you have at the end of the trading day, keeping them open overnight could do more harm than good as new risks are apparent once a new trading day arrives.
If your trades are at a profitable point and you want to hold them open overnight to potentially gain more profit, keep in mind that this is also a risk as the market could move against you.
Beware of Price Gaps
Most contracts trade 24/5 so it's not uncommon to be faced with large gaps, especially on a Friday. If an important event occurs after the market close on a Friday which affects your open trade, you could see an excessive point gap once the market reopens, so unless you have a large amount of trading capital, why would you take such lengthy risks?
Borrowing Costs
As mentioned earlier, when holding an overnight position on leverage, there will be borrowing costs. You are 'borrowing' money when using leverage from your broker to hold open your position, so the broker charges a fee based on the leverage that you have on your account.
Still insist on overnight trades?
If you want to hold positions open more than one day or 'swing trade' (where trades are open from a few days to a few weeks), then opting for micro or mini lots may be the best choice as they cost less to maintain in most cases.
If you are in the mindset of exploring overnight trading you can test your strategies in ForexTB's risk-free demo account. You can assess what works best for you by using $100,000 in virtual funds in order to prepare for live trading. Whatever decision you choose, stay on the cautious side and trade CFDs wisely!
This article was submitted by ForexTB.
