Should You Hold a Day Trading Position Overnight?

Trader at desk watching three computer monitors
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Day traders buy and sell stocks, currencies, or futures throughout the trading session. Typically, these trades close before the market does. Holding a position overnight requires careful consideration.

Typically, traders want to hold trades overnight, either to increase their profit or in hopes that a losing trade will be reduced or turn into a profit the following day. Holding day trading positions overnight is risky, but there may be some cases when it makes sense. Keep reading to learn more.

Key Takeaways

  • Generally, it's very risky to hold day trades overnight.
  • Even with a losing trade, it's usually better to close out and start fresh with new trades the next day.
  • Several factors can affect a stock overnight, meaning that the risk of significant loss is as high as the chance of a big gain.
  • There are some exceptions to this rule, such as certain forex trades, but day trades are usually best left as day trades.

What to Consider Before Holding a Position Overnight

Each market (stocks, forex, and futures) has different factors to consider:

  • Risk and risk management
  • Capital cost of holding the position
  • Changes in leverage
  • Strategic reason for holding the position overnight 

Successful Day Trading Strategies

Successful day traders have clearly defined boundaries about when they trade and when they will take profits and losses. Often, these boundaries include the use of stop-loss orders, trailing stops, and profit targets. If one of these orders that closes a trade is not reached by the end of the trading session, the position is manually closed.

Take Losses at the Close

Losing day trades should not be held overnight. Take the loss, and begin trading fresh the next day. If proper risk management protocols are being used, then no single loss is worth the gamble. Holding a day trade after-hours can be a gamble, because once the market closes, new risks are introduced.

Lock In Profits at the Close

If you're seeking additional profit on a day trade by holding overnight, this, too, is a gamble. Conditions change (or trading is unavailable in some markets) after market hours, and while the gain could increase, it could also turn into a loss. Lock in the profit, and trade afresh the next day. Only swing trades (trades that last a couple of days to a couple of months) should be held overnight. These should be planned before the trade is placed, not once you are in the trade. 

There are few good reasons to hold a trade overnight unless you are absolutely forced to do so because of a trading halt or lack of liquidity.

Risks of Overnight Stock Trades

Consider these factors for each market when holding a position overnight. 

Leverage Requirements Change for Overnight Trading

Most U.S. brokers will provide up to 4:1 leverage on day trades, but only up to 2:1 leverage on overnight positions. That means you that have less capital available when holding overnight, and it's possible you won't have enough in the first place.

Borrowing Costs

If holding overnight, on leverage, there will be borrowing costs. You are borrowing money (leverage) from your broker to hold that position. If the price drops at opening, you still owe that money.

Less Liquidity After the Closing Bell

Most stocks and ETFs typically have no volume until the next morning before the market opens (pre-market). This leaves the trader hostage to the whims of the market as to where it will open the next day. It could begin trading the next day much lower or higher (called a "gap"). It is a significant unknown.

Overnight News Can Impact the Stock

A significant economic data release, natural disaster, or key executive death could result in a substantial price difference between the prior day and the next morning, Even if you place a stop-loss order, it may not protect you. The stop-loss will fill at the nearest price, which could be significantly worse than the price you expected.

Sometimes Gaps Work for You

A gap could also work in a trader's favor. If it does, that would create a much larger gain than expected. But the risk of an adverse price gap is too high.

Risks of Overnight Forex Trades

There is always a major global market open for business somewhere on the globe, which allows for seamless 24-hour trading. So, holding an overnight position is not a major concern in the forex market.

The Forex Market Trades 24 Hours

Price gaps are rare during the week but can occur following a weekend (when there is no trading). It's recommended that day traders close all trades, which could be impacted by a scheduled high-impact economic data release, whether holding overnight or not. 

Leverage Does Not Typically Change

This could vary by broker, if you are holding overnight, but no change in leverage means that your capital (buying power) is not affected.

More Volume and Movement When Markets Are Open

Most currency pairs have much higher volume and movement when European and U.S. markets are open. Day traders are better off trading during the active times and closing positions before the quiet times.

Lower Volume Can Yield Random Sharp Movements

Lower volume during the currency market's quiet times can result in very sharp and random movements caused by small groups of traders or large orders. It can be difficult to trade in such conditions with no strategy for this type of low-volume environment. 

Risks of Overnight Futures Trades

The futures market is a hybrid of the stock and forex markets. Many futures markets trade 24 hours, but capital and leverage are affected by holding overnight. 

Day Trading Margins May Be Higher

The broker is likely to require a higher day trading margin in the trader's account if holding overnight. If you put up $500 to day trade a specific single contract, you may be required to put up more than $5,000 for each contract you hold overnight.

News Can Trigger Price Gaps

An economic data release or significant news can affect a price. Price gaps can be substantial when there is little liquidity outside of normal market hours.

The Bottom Line

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. That helps you 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 drop overnight.