An overnight position refers to a trade or position that is carried over from the current trading day into the next trading day.
Essentially, it’s any trade that is still open when the trading day ends.
For example, if a trader buys a particular stock during the trading day and doesn’t sell it by the close of trading, that stock position is considered an ‘overnight position’.
The same concept applies in the forex market, futures, or any other market that has a clearly defined trading day.
Overnight positions are important because they come with additional risks that traders need to be aware of. These risks include:
- Gap Risk: The risk that the opening price the next day will not be the same as the closing price the day before. This is often due to news or events that occur while the market is closed and can result in substantial losses (or gains) for traders holding overnight positions.
- Overnight Interest or Swap: In the forex market, traders holding an overnight position are typically charged or credited a certain amount of interest, known as the swap or rollover rate, depending on the difference in interest rates between the two currencies in the pair. If the currency you’re ‘long’ on has a higher interest rate than the one you’re ‘short’ on, you’ll receive interest. If it’s lower, you’ll be charged interest.
- Liquidity Risk: At the opening and closing of the trading day, market liquidity can be lower, which can lead to higher spreads and increased trading costs.
Despite these risks, holding overnight positions can also present opportunities for profit if a trader expects a security’s price to move significantly in their favor from one day to the next.
It’s part of many trading strategies, particularly for swing and position traders who have a longer-term outlook.