Day traders typically buy and sell their positions throughout a day’s trading session. Trades are generally closed before the market ends, but some traders debate whether they should hold their position overnight.
An overnight position mainly involves holding positions beyond the market close. For example, futures typically stop trading at 5pm EDT. The following day's trading begins an hour after the closing of the previous day, at 6pm EDT. However, some traders find the concept of overnight trading confusing.
It is important to understand that there is no “overnight” close. Futures trade from 6pm on Sunday to 5pm on Friday. “Overnight” is an ambiguous term, mainly because most commodities in the futures market trade 24/5 weekly.
Most new traders make the mistake of holding positions overnight. This may be either deliberate or unintentional, but it is rarely a good path to take.
Here’s what may happen in the case of unintended mistakes:
- Traders forget to exit their positions before the market closes.
- Futures traders assume there is a late period where contracts are not trading.
Here are the reasons futures traders might hold an overnight position, even though they shouldn’t:
- They fail to realise the market isn’t emotional, believing it will help them recover their losses by holding their positions.
- They believe the market will continue in their direction but don’t have substantial capital to cover it in the case of margin calls.
- Rarely, they might intentionally hold these positions on ambiguous platforms that refuse to show the previous day’s open positions.
The most devastating risk is the possibility of their accounts ending up in the red (negative). When traders end up in debt, they owe more than their remaining trading balance.
The table above shows a calendar for futures traders who engage in day trading.
Risks involved when trading overnight position in the futures market
Here is a look at the main risks involved in holding overnight positions.
Shortage of capital and leverage
Traders should be aware that holding positions beyond the market close triggers a maintenance cost acquisition. For example, traders on a single ES contract for day trading might pay $500 per contract. However, as soon as the position trades beyond 5:00 pm ET, an automatic $6,000 will be added to each contract, in addition to a rise in margin requirements.
Traders with a $20,000 account can trade 20 ES contracts for a total margin of $10,000. If they hold their positions beyond the market close, they would need an extra $120,000 or more to keep their positions open.
Holding positions overnight to recover the day’s losses
A common blunder is holding positions overnight in hopes of recovering losses. Traders should not risk their positions because of their initial trading loss as the trades may not go as planned.
There's no guarantee that the market will go as expected when traders hold their positions overnight. Moreover, the possibility of getting the position out of the red into profit is significantly slimmer than the negative payoff.
Margin calls and broker’s fees
Traders who receive a margin call from their broker may be told to exit their positions.
In situations where traders refuse to exit their positions, the brokerage liquidates the position. Brokers charge a fee of $50 or more per contract for liquidating positions. Most brokers use an app to automate their liquidation process, which means that the software liquidates traders' position once the trades become under-margined.
Price gaps in overnight positions
Price gaps may occur if there is a significant news release. Price gaps can be enormous when there is little liquidity outside of regular market hours. There may be substantial price gaps during the maintenance period, especially when the exchange shuts down trading activities for a specified period at the close of the day.
The chart above shows a price gap in the market during a weekend.
When to trade futures contract overnight
Traders can place overnight positions on liquid Micro E-Mini Futures contracts after ensuring they have enough capital for maintenance costs.
Micro E-Mini Futures make an overnight position a more reasonable prospect. They are smaller representations of the standard E-Mini index by-products for the following US stock indices: Nasdaq 100, Russell 2000, Dow Jones Industrial Average and S&P 500.
Traders leverage on the underlying “cash” stock index for each futures contract. These byproducts are similar to trading a compressed version of an entire index using a contract.
The bottom line
Traders should avoid holding positions overnight unless there is a solid reason to do so. They should also ensure they have enough capital for maintenance costs. Those who are interested in holding overnight positions might consider trading micro contracts.