Traders are often rational when making certain trading decisions to ensure the market is at least in their favor. Overnight trading is one of the controversial types of trading because of its higher risks and higher volatility compared to day trading. Overnight trading is a type of trade that allows a trader to open a position after the market closes.
People who engage in overnight trade frequently hold their positions overnight and can choose to sell or trade them before the market opens the following morning. This article explains the reasons why overnight trading is not always an ideal option.
In a market where traders can only expect the unknown because of the volatility and risks, trading overnight may not be profitable. Here are a few reasons why.
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1. Higher volatility
While the market is open for 24 hours trading, the volume of participants trading when the market closes will reduce, making the market more unpredictable and risky than trading during regular trading hours. The trading volumes and liquidity will significantly drop during overnight trading, limiting your chances of making a profit.
Overnight trading will also affect the market’s opening price because of its high volatility. Many traders intend to make more profit by trading overnight. However, this type of trading is of a lesser advantage because you won’t have access to enough capital since the number of leverage available for overnight positions will become lower.
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2. Less favorable market conditions
Trading overnight is less favorable for less experienced traders because it is dominated with competition from professional traders. Most professional traders and investors engage in overnight trading to trade news like earnings releases released after the closing. For less experienced investors, this may cause volatility and the possibility of larger losses. However, these professional traders often make headway because they know the dangers of overnight trading.
Overnight trading won’t work for less experienced traders because these markets frequently have less liquidity and have the potential to see significant price changes on little volume. Devastating news or other market-affecting events can cause the market to change drastically overnight, so it is best you strictly limit your trading to the daytime only to avoid risk.
3. Increased chances of loss
While the market is volatile and risky during overnight trading, you will most likely witness more loss than gain because overnight trading does not accept stop-loss orders that may assist you in limiting your loss.
There is a risk associated with holding an open position overnight, and it is uncommon for a position to turn a loss from during the day into a profit. By holding a stake overnight, one hopes to raise the transaction’s potential profit or lessen the loss from a lost daytime trade. However, it is impossible to place an aftermarket trade with a stop-loss order.
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4. Price Gap
Traders can benefit from the price gap, but there is a higher chance of a negative price gap when trading overnight, which may result in more loss than gain. The market is full of uncertainties, leaving traders at the mercy of the whim of the market. While you may be anticipating a substantial gain, you may witness a down if the price gap is negative.
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Since you can only predict the price at which the market will start trading the next day, you shouldn’t hold positions overnight because it can be affected by an upcoming high-impact economic data release, whether they will be held overnight or not.
Bottom line
Should you trade overnight as a trader? Undoubtedly, overnight trading has its benefits because they are considered a convenient time to trade. However, the disadvantages are higher compared to the benefits. Before starting an overnight trade, you should at least consider the risks, the cost of holding a position overnight, and leverage. A trader shouldn’t engage in aftermarket trading unless they have a strategic reason for holding the position.
This is also a risk if you keep a day trade overnight in hopes of making more money. After market hours, conditions can change (or trading may not be possible in some markets), and while the gain may grow, it may also turn into a loss. Lock in the profit and start trading again the next day.
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