Overnight Position: Definition, Risks and Benefits in Trading

What Is an Overnight Position?

Overnight positions are open trades that have not been closed or liquidated by the end of the normal trading day.

Overnight positions are not held by day traders but are quite common in foreign exchange and futures markets. Long-term investors naturally hold overnight positions on an ongoing basis.

Key Takeaways

  • Overnight positions are those that have not been closed out by the end of a trading day.
  • Overnight positions can expose an investor to the risk that new events may occur while the markets are closed.
  • Day traders typically try to avoid holding overnight positions.
  • In the FX SPOT markets, overnight positions are subject to rollover interest charges that are debited from or credited to the client's account.

Understanding Overnight Positions

Simply put, overnight positions are trading positions that are not closed by the end of the trading day. These trades are held overnight for trading the following day. Overnight positions expose the traders to risk from adverse movements that occur after normal trading closes.

This risk can be mitigated to varying degrees, depending on the markets traded. For example, in the currency market, or spot market, any contingent orders, such as stop-loss and limit orders, can be attached to the open position.

In the currency markets, overnight positions represent all open long and short positions that a forex trader possesses as of 5:00 p.m. EST, which is the end of the forex trading day.

Overnight trading refers to trades that are placed after an exchange’s close and before its open. Overnight trading hours can vary based on the type of exchange in which an investor seeks to transact.

Alternative markets may include foreign exchange trading and cryptocurrencies. Each market has standards for overnight trading that must be considered by investors when placing trades during off-market hours.

Special Considerations

There are benefits and drawbacks to holding an overnight position. In the forex market, 5 p.m. EST is considered the end of the trading day, although, with the advent of technology and the global nature of this arena, this market is open 24 hours a day, five days a week.

Because a new trading day begins after 5 p.m., positions opened as late as 4:59 p.m. EST and closed as early as 5:01 p.m. EST are still considered to be overnight positions. The overlap of trading hours between exchanges in North America, Australia, Asia, and European markets makes it possible for a trader to execute a foreign exchange trade through a broker-dealer at any time.

The rollover interest rate on overnight positions affects the trading account as either a credit or a debit. In forex, a rollover means that a position extends at the end of the trading day without settling. Most forex trades roll over daily until they close out or settle. The rollovers are conducted using either spot-next or tom-next transactions.

If a trader entered into a position on Monday at 4:59 p.m. EST and closes it on the same Monday at 5:03 p.m. EST, this will still be considered an overnight position, since the position was held past 5:00 p.m. EST, and is subject to rollover interest.

Maintaining an Overnight Position

Forex traders will generally take the risk, cost of capital, leverage changes, and strategy into account when deciding to maintain an overnight position. The goal of keeping an overnight position is to try to increase profit on the trade by holding it overnight or by minimizing the loss of a losing daytime trade.

Some stock investors believe that maintaining an overnight position is a beneficial strategy, while others think purchasing or selling stocks shortly before closing time is a more profitable move. Those who believe in keeping an overnight position often hold their positions overnight, then sell, or trade, them as close to the opening bell as possible in the morning.

By trading early, stocks and traders are fresh, and any potential negative aspects of the previous day’s market have cleared the account.

A day trader often closes all trades before the end of the trading day, so as not to hold open positions overnight.

It is rare that an overnight position can transform a daytime loss into a profit and, additionally, there is a risk with keeping an open position overnight. Primarily, the market can shift dramatically overnight, with the arrival of catastrophic news or other events that can affect the markets.

This risk is why many investors have a strict daytime trading-only policy. Borrowing costs may occur as an overnight position requires broker leverage to maintain the position.

Most companies report their financial results when markets are closed, to enable all investors to receive the information at the same time. Significant announcements may be made after market hours, rather than in the middle of the trading day and can affect overnight positions.

Article Sources
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  1. GAIN Capital Group. "Rollover Rates."

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