For the most part, day traders – as the name implies – will look to open positions at some point within the trading session and then close them for a profit or a hedged loss before the bell rings to signal the end of the trading day.
However, for some – especially newcomers to trading – there is a temptation to hold their position overnight, particularly if the market has moved against them during the day.
This is a hazardous strategy, as we will discover in this article.
The scourge of overnight fees
For some traders considering holding their position overnight, the decision can be made with ease when we consider the elephant in the room: overnight fees.
Some brokers charge overnight fees across their asset range. While they can be low in monetary terms, if you operate a trading strategy with tight margins, any charge will eat into and compromise your profitability.
So, before we even carry on with this discussion, ensure your broker doesn’t charge overnight fees indiscriminately – eToro, for example, only implements the charge on CFDs so that you can hold positions with confidence. Any eToro deposit, therefore, comes with peace of mind.
But there is more to this debate than just the fees charged.
Why hold overnight?
First of all, let’s consider why a day trader might hold a position until the next session.
The most likely reason is that they did not want to close out a loss and so have put their faith in the hope that the market will move in their favor overnight.
Did you see the key word there – ‘hope’?
As we know, as soon as emotions enter into our decisions, then that’s when we risk becoming a losing trader, and so hope should never outmaneuver expectation in your thinking.
There are instances in which we are confident that the overnight market movements will go our way. We may be expecting some news to break that aids the value of our asset, or a company in which we have invested is due to announce its earnings report before the opening bell.
In this case, we have evidence to suggest that holding our position overnight is smart, not just blind faith that it will.
Close out or hold?
As a trading session enters its final throes, we have three choices available depending on our position: we can close at a loss, close at a profit, or hold overnight.
We first have to confirm whether we are closing or holding for strategic reasons or because of our emotional response – if the latter, you should close out immediately.
If the former, there are other considerations before you commit to holding. As well as the possibility of overnight fees, we also have to accept that we take on more risk by leaving our position open without knowing how the market will fare outside of regular trading hours – this becomes gambling rather than investing.
Remember too that your leverage may change – typically, most brokers will drop the amount of leverage on your orders overnight, which may impact your profitability.
Never lose sight of the overall goal of trading is to make money. If you have a profit in hand from your day trades, then close your position. Why risk that glorious green when it could so easily have turned red by the time you awaken in the morning, especially when liquidity can be so low overnight and leave huge gaps to be made up the next day.
The fear of the unknown, especially in these times of volatile economic and political landscapes around the globe, should be enough to persuade day traders that holding their position overnight is a no-no.
The exception to the rule: forex
The forex market is active and liquid 24-hours a day, and so in this case, day traders CAN hold their positions even after their head has hit the pillow.
But some of the same rules apply, and you should do your research to stay ahead of the game. What economic, political, or sociological factors could impact the price of your forex pairs overnight or across the weekend?
There is a trade-off – pun intended – when holding forex assets outside of the main trading session. Activity tends to be low during these times, so price movement can be minimal, barring a major event. If you are paying overnight fees, you need to consider whether the potential gains in your portfolio outweigh the costs payable.
With such minimal liquidity comes the threat that a sudden, significant surge in investment will move the market considerably, and if you are asleep, you will have no time to react! However, you can rest easy if you utilize tools such as Stop/Loss and Take Profit.
So should you hold overnight?
If you have read this article up until now, you will probably already know the answer to this question.
The advantages for day traders of holding their positions overnight are minuscule, and they tend to be far outweighed by the negatives.
What you are doing is taking on unnecessary risk with no absolute certainty of any reward. It is far more likely that market downturns will occur at the close of a session than a major lift.
If you read up on trading theory, one word gets returned to time after time – mindset. You have to have the correct psychology to be a successful long-term trader, and that includes closing at a loss towards the end of a session.
Even though it’s against human nature to take a loss so willingly, you can take it on the chin and start trading again the next day. If you hold a position, and there’s a market downturn, you will then have to close at a more considerable loss or hold for an interminable amount of time just to hopefully break even.
If you’re a day trader, stick to day trading. Close your positions at the end of the session, whether that’s profitable or otherwise, and sleep easy ahead of a new day of opportunities ahead.
