In this instance trading refers to the buying and selling of financial products, currencies and commodities which take place on international markets. The improvement in information technology has opened access to a variety of financial markets across the globe and on some types of market (such as currency markets), it is now possible to trade 24 hours a day.
When a trader buys a financial product or commodity or makes a sale, he is taking up a position with regard to that product. Overnight trading entails the taking up of a position (buy or sell) which is not liquidated during the trading day or requesting a trade which will be executed after the trading day has closed. Thus the trader is said to have an overnight trading position as it is likely that the position will remain in place overnight or until the opening of the new trading day.
Overnight trading is deemed to be extremely risky as events may unfold which will affect the trader’s position and may have a significant effect on his/her portfolio which cannot be changed until the next trading day. For example, if you have bought gold futures and have not closed your position by the end of the trading day, then you will not be able to sell that position until the next trading day, by which time a global event may have significantly altered the value of the yellow metal. Overnight trading effectively means that traders cannot control their risk exposures and become hostages of fate as they cannot modify their positions until the new trading day commences. Overnight gold trading is especially risky when leverage is used as the risks are multiplied many times as a single unfortunate even could wipe a trader out (naturally, the same applies to other assets).
Whilst the market is open risks can be somewhat mitigated by the use of stop losses and pre-determined sell levels. Stop losses are instructions to the broker to liquidate a specific position if a certain loss making price is reached. For example, if a trader buys at 100, he may put in a stop loss order at 80, thus limiting his possible losses. A sell level is the converse of a stop loss in which the trader issues an instruction to sell the security if a certain profit making price is realised. Though sell levels reduce potential profits to the sell level amount they may be useful in volatile markets.
For example, if the trader buys at 100 and sets a sell level of 120 and the price subsequently reaches 120 then he/she will have locked in their profits. If the market subsequently falls to 90 they will not incur any losses as the trade would have been closed out at the 120 level. These tools to limit risks are not available on overnight trading positions and stop loss orders will only be executed at levels as close as possible to the pre-determined level once the market re-opens.
The overnight trading is associated with a risk of loss if things become unfavorable when markets are closed and one is unable to close their position. Therefore, traders should be sure to use only a small portion of their portfolio for each trade. Long-term investors should make sure that they hold their precious metals in the form that is safe from this overnight risk - like physical bullion.
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