As a trader, risk management is a vital skill, and managing overnight trading risks is a critical aspect of it. In this comprehensive guide, we’ll dive into the nitty-gritty of overnight positions on the eToro platform and provide up-to-date information to help you manage your risks effectively.
Key Takeaways
βOvernight positions are trades left open beyond the market’s closing time. |
βTraders may keep positions open overnight to recover losses or increase success. |
βRisks of overnight positions include price gaps, additional costs, and psychological impacts. |
βUse stop-loss, take-profit, and trailing stop-loss tools to mitigate risks. |
βOvernight fees apply to certain assets and depend on the type of position. |
Table of content
- π What Is an Overnight Position?
- β οΈ Risks of Overnight Positions
- π‘οΈ Mitigating Risks
- π΄ Overnight Fees
- πΉ How Are They Charged?
- π Conclusion
- eToro trading-strategies: β’ Learn more trading strategiesπ
- Trading Strategies:
- Investment Knowledge:
- Trading Techniques:
- Other Trading Topics:
- GENERAL RISK WARNING
- Author & Expert Trader - Financial Analyst :
π What Is an Overnight Position?
Overnight positions are trades left open beyond the market’s closing time, remaining open until the next trading day. Keeping trades open overnight exposes you to risks, such as negative news, fees, and unfavorable market impacts.
Traders Keep Positions Open Overnight? Traders may choose to keep positions open overnight for various reasons, including:
- Recovering losses: A trader may hope that the market turns around in their favor the next day, allowing them to recover losses.
- Increasing profits: If a trader’s position is already profitable, they may expect this trend to continue and choose not to close the position during the day.
β οΈ Risks of Overnight Positions
Keeping a position open overnight can result in several risks:
- Price gaps: Differences between closing and opening prices may occur due to major news or events, causing losses beyond your desired stop-loss level.
- Costs of keeping a position open: Overnight fees are charged on certain assets, depending on the position type and asset.
- Psychological impact: Managing emotions during the day is already challenging, and leaving a position open overnight adds stress due to factors beyond your control.
π‘οΈ Mitigating Risks
To manage overnight trading risks, consider the following strategies:
- Analyze asset price movements, market conditions, and your trading strategy before deciding to keep a position open overnight.
- Use stop-loss, take-profit, and trailing stop-loss orders to limit losses and lock in success. However, be aware that these orders are executed only once the markets reopen at the new opening price.
- Lower leverage levels can reduce exposure to losses, but this depends on your knowledge and skills in managing leveraged trades.
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 assetβs price is now way above $250, and the position will be closed with a success of more than you hoped for.
π΄ Overnight Fees
Overnight fees apply to specific assets and depend on the type of position. Here’s a breakdown of how these fees are calculated:
- Stocks, cryptocurrencies, and ETFs: Non-leveraged long positions on these assets are not subject to overnight fees, while short positions and leveraged long positions are.
- Indices: All index trades on eToro are made using CFDs and are subject to overnight fees.
- Currencies and precious metals: These assets use a different formula that incorporates the Tom-Next day rate and eToro’s markup.
- Energy (Oil and Gas): Due to the complexity of pricing these assets, a unique formula is used to calculate overnight fees.
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 aΒ shortΒ position on a stock and for long (buy) position on stock such fees are not applied).
Non-leveraged long positions onΒ stocks, cryptocurrencies and ETFsΒ 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 isΒ 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.
IndicesΒ 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% β LIBOR)/365
The second part of the formula, 3% + or β LIBOR converted into a daily percentage, is essentially eToroβs markup on top of LIBOR.
In case of currencies and precious metals, a slightly different formula is applied and uses something calledΒ Tom-NextΒ 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 eToroβs 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) β (number of units * tom-next rate)
And finally there is a special case for theΒ energy (Oil and Gas) marketΒ 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 twoΒ 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 success or losses made alongside this movement. The two formulas also contain a small markup:
Long position: Β β Units of asset * ((markup % * price)/365 + 1/N. days * (next β front))
Short position: β Units of assets * ((markup % * price)/365 + 1/N. days * (next β 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.
πΉ How Are They Charged?
Overnight fees are taken from your account balance, even if that will result in a negative balance in case you donβt have enough 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.
π Conclusion
Now you have a better understanding of the risks and fees associated with keeping positions open overnight on eToro. Trading always involves capital loss risk, but with the right knowledge and strategies, you can manage these risks effectively. Best of luck in your trading journey!
eToro trading-strategies: β’ Learn more trading strategiesπ
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