Should you hold a day trading position overnight?
If you’re a day trader (or considering it), buying and selling financial instruments throughout a specific trading session. Usually, you would close all of your trades before your respective market closes. However, it’s never always that simple. If you have a good trade running at the end of your trading session you maybe but you’re debating whether to hold this position overnight.
In this article, we will discuss and breakdown what should be done if you find yourself in this situation.
Have you ever considered holding your day trades overnight? Although many traders and investors conduct this practice, today I will explain to you why it is a bad idea if you are day trading.
There is a multitude of factors to consider with an overnight trade, and each market (forex, stocks and cryptocurrency) have a variety of factors to consider. A professional trader needs to address and consider at least one of the following:
- Risk and risk management need to be addressed
- as well as the capital cost of holding the position,
- changes in leverage
- The strategic reason (if there is one) for holding the position overnight.
Note – This article is aimed at “Day Traders”. Day traders are traders that open and close positions during the trading day, and by definition don’t hold trades overnight. Typically closing any open positions at the end of their respective trading session.
Swing traders & long-term investors typically do not worry about closing trades overnight as they are playing long term movements and have already factored in the timescale of the position.
Why would someone hold a trade overnight?
Typically, traders want to hold trades overnight either to increase their profit (has not achieved their anticipated target/ take profit), or they hope a losing trade will be reduced or turn into a profit the following day.
If you are considering holding a trade overnight, you must first consider the reason for doing it. If the reason is not sound, then close the position before you go to sleep or the market closes.
Successful day traders have clearly defined trade boundaries when they trade, stating exactly when they will take profits and losses. Often these boundaries include the use of stop-loss orders, trailing stops and profit targets. If the trade is not automatically closed by either of the boundaries by the end of the trading session, the position is manually closed.
Holding a trade overnight presents additional risk and introduces new variables which likely weren’t taken into consideration when the trade was originally placed.
Losing day trades should not be held overnight. Take the loss and begin trading fresh the next day.
If you are using proper risk management and trading with a plan then no single loss should be detrimental to your account, so there is no reason to gamble on whether a trade will turn profitable after the market closes/next day.
Holding a trade over the weekend is often a gamble because once the market closes new risks are introduced (risks vary by market, with some presenting more risk than others). There is no telling which way the market will reopen as after-hours trading often dramatically moves the market.
If you are looking to hold a trade until the next day just to achieve some additional profit, this too is a gamble.
Conditions change and while the gain could increase, it could also turn into a loss. Lock in the profit whilst you still have the chance and trade afresh the next day. More profit can be made tomorrow with a new opportunity. The hope of making more money isn’t typically a good reason for taking the risk of holding a day trade overnight.
It may also be tempting to hold a day trade if there is a big move expected the next day. For example, a company is revealing its earnings overnight which will cause the price to jump or dump the next day.
While there is big profit potential here, there is also a huge risk if the trader ends up on the wrong side of the move.
There are hardly any valid reasons to hold a trade overnight unless absolutely forced into it because of a trading halt or lack of liquidity. Only swing trades (trades that last a couple of days to a couple of months) should be held overnight, and this should be planned before the trade is placed, not once in the trade.
5 reasons it’s a terrible idea to hold trades overnight:
1. Gaps hurt
If you are a trader, you have probably noticed that when the market opens, volatile stocks and currencies will have big opening gaps from the previous days’ close.
The reason for this is there are news events that occur prior to the market open that can have a positive or negative impact on the share price.
If you do this, you are subject to the risk of an after-hours or morning gap. The gap could be bullish or bearish. Therefore, your chances are 50-50 on the trade.
2. Your stop-loss is worthless
The worst thing when holding your trade overnight is that stop-loss orders cannot protect you from the gaps. You will probably say “How is that possible? Isn’t the stop supposed to close my order immediately once triggered?
That is absolutely correct; however, when there is a gap, the price technically jumps your order, rendering your stop-loss worthless.
Once the market opens, the first price will trigger the stop loss, which will likely be well beyond where you hoped to cut ties.
3. Broker’s punishment
Yes, that is correct. Brokers can and will charge an overnight fee on someday trading accounts. This fee can run as high as a few hundred basis points.
The fewer fees you pay the greater odds of success. So, if you are that much in love with the stock, you can always reopen your position in the morning.
4. Margin size
If you would like to hold a trade overnight you should definitely have a solid bankroll. Since you plan to stay in the market with the looming risk of a gap, you should make sure you can afford any potential margin calls.
A margin call means your broker will start selling your assets in order to cover any shortfall. In other words, your overnight trades and available cash could be wiped out to cover the broker’s potential losses.
The other way to protect yourself from the aggressive margin call is pretty straight forward –deposit more money! However, cash sitting in an account just to protect against a potential margin call does not provide the best rate of return.
What about you? If you somehow manage to tackle the insidious market and get out unscathed, you should ask yourself this question: “Is holding a position overnight worth the stress?”
The first four reasons not to hold a position overnight all translate into stress on you.
Think about how you are going to spend the night in your bed when you have all of this on your mind.
Isn’t your bed the place where you should relax, gaining energy and strength for the next trading day?
Day trades should be left as day trades. Unless a trade was originally planned to be held overnight, it should be closed during active market hours or whilst you still awake and active to monitor your position. This helps avoid the common problem of holding onto a losing trade for longer in the hopes that it will return to profitability or gambling on whether a market will jump or dump overnight.
Whether day trading or holding positions overnight, be aware of high-impact news events which could render a stop loss ineffective. Day traders should close all positions before such events unless their strategy is specifically calibrated and tested to withstand substantial volatility.
By closing your trades overnight and sticking to your trading plan you are much more likely to achieve consistent results when you trade.