Risk management is one of the most important underlying skills in trading and there are many aspects to it. Managing your positions that are kept open overnight on eToro platform is one of them, and below you can find a detailed guide on how to do that.
(NOTE: Before we continue, we have to give a disclaimer that the trading products offered by the companies listed on this website carry a high level of risk and can result in the loss of all your funds. CFDs are complicated instruments that are never guaranteed to provide you supplemental earnings. In fact, Around 68% of all retail investors experienced a loss while trading CFDs. Make sure to keep this in mind before attempting to use the eToro platform yourself. All the information found on this website is not official trading advice and all practices shown are referenced for the use of the Demo account only.)
What is an overnight position?
Overnight positions are essentially trades that you do not close until the end of the trading day (when the market closes) and are maintained open until the next day to be traded further. Keeping open trades overnight can expose you to certain risks, such as some negative economic or company news with unfavorable impacts, but also fees, as explained below.
Why do traders keep positions open overnight?
- Hope to recover losses. Perhaps the trader was facing a certain loss on a position but didn’t want to close it during the day in hope that the market will turn around in their favor and decided to keep it open for the next day. There is a chance they may be right but remember that markets are constantly changing and any trade bears capital loss risk.
- Hoping to increase profits. A trader may perhaps be in a position which is generating profits and expect this pattern to continue on for the next day, so they do not close their position on the day. This however exposes them to additional risks in case the market changes against them.
Risks of an overnight position
There are many things that can go wrong around an overnight trade and here are only some of them:
- Price gaps. Price gaps are the differences between the closing prices and opening prices in the next trading day and they exist because of the way the bid-ask spread functions in financial markets. This happens in case some major company news or a political or economic event comes out after the market closes, and after weekends these gaps may be even more pronounced because of limited market liquidity during those 2 days of no trading. This can be even more important for relatively volatile stocks or other assets. These price gaps could subject you to additional capital losses beyond your desired level of stop-loss. Do bear in mind that is not a shortcoming of the eToro platform but simply an outcome of how financial markets operate.
- Costs of keeping a position open. Overnight fees are charged to traders of the platform at 5 pm New York time on either Wednesday or Friday, depending on the asset. But more of this is discussed in the next section.
- Psychological impact. Managing your trades during the day is already a challenge to your abilities to manage emotions, and leaving a position open overnight subjects you to additional stress are there are factors affecting your trades beyond your control.
Whether a trader should keep the position depends on their close analysis of the asset’s price movements and the surrounding market conditions as well as their trading strategy. But there is also a possibility of setting certain restrictions on your trades using the tools of stop-loss and take-profit to help your risk management. This helps to reduce the amount of losses by ensuring that the position will be closed at a certain loss or profit level but bear in mind that these orders are executed only once the markets re-open and the new opening price is updated.
As a simple example, consider you are holding a position open for an asset which you purchased for a price of $200 and also set a stop-loss for a value of $150. After you decide to keep this trade open overnight, some bad news come about the management of the company like fraud or bad accounting outside the trading hours, and the price of your asset drops dramatically to $100. Now when the markets re-open, the platform will close down your position because the price of your asset is now way below your stop-loss. So the sale of your asset will happen at the opening market price of $100 and not the stop-loss value of $150 you wanted, which is something you need to consider before choosing to keep a trade open overnight.
In case of take-profit however, the situation could turn to your advantage sometimes. Considering the same asset you bought for $200, you may also set a take-profit value of $250. Now if the news overnight or after the weekend is positive the price of the asset will go up and the new opening price is as high as $300. Once the market opens, eToro will realize that the asset’s price is now way above $250, and the position will be closed with a profit of more than you hoped for.
There is also an option for trailing stop-loss available on the platform, which adjusts your level of stop-loss alongside increasing profit on your trades. Finally, a lower level of leverage could reduce your exposure to such losses but that depends on your knowledge and skills in managing leveraged trades.
What assets are subject to overnight fees and how are they calculated?
The method for calculating overnight fees on eToro is quite standard as compared to the industry and there is a unique formula that applies for each type of asset. Whether the overnight fee applies depends on whether your position uses leverage or not i.e. whether the trade is done using CFD for short positions. Why? Trading with leverage essentially means that the eToro platform is lending you funds to complete a trade and therefore it charges an interest on it.
If the position is held open over the weekend the amount of the fee triples as there are three nights over which the position remains open. Depending on the asset you are holding these fees are charged on Wednesday or Friday. You can always see the amount of overnight fees while opening a trade, as shown on the image below (note these fees are for a short position on a stock and for long (buy) position on stock such fees are not applied).
Non-leveraged long positions on stocks, cryptocurrencies and ETFs allow you to hold the actual asset, so they are not subject to overnight fees, but short positions are traded using CFDs and such fees are therefore applicable.
For leveraged long and short positions, fees are calculated according to the formula:
Long position: units of assets * buy price * (6.4% + 1 month LIBOR)/ 365 days
Short position: units of assets * sell price * (2.9% + 1 month LIBOR)/ 365 days
What is LIBOR? London Interbank Offered Rate is an interest rate which is used as a benchmark used by global financial institutions such as major banks to lend each other in short-term on the international market. It is essentially an interest rate for borrowing banks use globally.
Indices are traded only using CFDs on the platform and overnight fees are calculated according to the following formulas:
Long position: (Price * Units of asset) * (3% + LIBOR)/365
Short position: (Price * Units of asset) * (3% – LIBOR)/365
The second part of the formula, 3% + or – LIBOR converted into a daily percentage, is essentially eToro’s markup on top of LIBOR.
In case of currencies and precious metals, a slightly different formula is applied and uses something called Tom-Next or Tomorrow-Next day Rate which is a name for a transaction on the foreign exchange market with a currency being bought and sold in a time period of two different days. Not to go into too much unnecessary detail, this allows traders to keep their trading positions without having to take on a physical delivery of their asset because usually in currency trading the actual asset delivery happens two days after the day of the transaction. It also uses eToro’s own markup, MU in short, which is 1% for currencies and 1.5% for spot metals such as gold. The complete formulas are as follows:
Long position: (Price * Units of asset) * (MU/ 365 days) + (number of units * tom-next rate)
Short position: (Price * Units of asset) * (MU/ 365 days) – (number of units * tom-next rate)
And finally there is a special case for the energy (Oil and Gas) market when it comes to overnight fees because of the complexity of pricing these assets as well as the way in which their prices move.
In simple terms, the price of these commodities is based on two futures contracts, one closest to the date of expiration (front) and the next closest (next). The price of such asset changes gradually in between the prices of these two futures over the number of days between their expiration (N. days) and overnight fees on eToro are necessary to offset any profits or losses made alongside this movement. The two formulas also contain a small markup:
Long position: – Units of asset * ((markup % * price)/365 + 1/N. days * (next – front))
Short position: – Units of assets * ((markup % * price)/365 + 1/N. days * (next – front))
There is certainly no need for you to calculate these values manually as all of them are displayed when you are opening any trades but this is a full transparent explanation that should give you an idea of how they are derived. You can also see that overnight fees are not always applied and that they differ from asset to asset because of their nature and the way they are priced by the market.
How are they charged?
Overnight fees are taken from your account balance, even if that will result in a negative balance in case you don’t have enought money available. In case of CopyTrading, this money will be taken out of your copy balance account. The total amount of fees you were charged for can be seen on your account statement or on the History page of your portfolio. Bear in mind that in the surrounding changing market conditions, eToro re-evaluates its fees and may change them accordingly so remember to stay updated on that matter.
Hopefully now you have a better understanding of what are the risks of keeping positions overnight on eToro and what fees this will result in. Remember that trading involves capital loss risk and best of luck in your trading!
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