All in One Night: Overnight Trading Explained

In the foreign exchange market, when the clock strikes 17:00 EST, it marks the end of a trading day, and unlike a typical day, hours don’t have to pass before a new day begins; at 17:01 EST, it’s the dawn of a new trading day.

When it’s past 17:00 EST, the short and long positions that are still open? They are closed, which suggests that your options are either to earn from interest rates or to ask for a pay-out. In most cases, the more advantageous choice is to profit from an interest rate.

This is how overnight trading works.

Introduction to Overnight Trading

Overnight trading refers to establishing a short / long position when the official trading day is about to end. You need to be mindful of a currency pair’s flow and the possible things that could affect it over a short period. It draws emphasis on the fact that although the forex market is open for 24 hours, you need to be aware of its own time; trading isn’t based on your preferred 24-hour schedule.

Factors to keep in mind:

• A currency pair’s price movement
• The interest rates of both currencies (in a currency pair) in particular countries
• Market behavior

How Exactly Do You Earn Money from an Overnight Trade?

To know how you can earn money from an overnight trade, rollover is the word you need to be familiar with; rollover describes the interest rates that are carried over from one trading day into the next trading day. For instance, a trader bought CHF (or Swiss Franc) that has an interest rate of 4 %, and he is selling JPY (or Japanese Yen) that has an interest rate of 1 %. In such a situation, a 3 % interest rate for the exchange on that trading day will be rolled over to the next trading day.

To profit with overnight trading, you need to take into account the overlap of hours between particular countries; for instance, if one of the currency in a pair is from an Asian country, and the other is from a North American country, you have to check the difference in the trading hours. Due to the trading hours’ overlap, you can formulate a profitable strategy.

No Extensions Allowed

One of the main reasons that the forex market is so effective is that it operates based on strict policies; traders are required to adhere to such regulations. If a trader enters the market at 16:59 EST, the position he opened will be considered. On the other hand, if a trade was opened at 17:02 EST Thursday, it won’t be honored as a trade on a Thursday, since it is 2 minutes past the deadline. Furthermore, if the time to call it a day is 17:00 EST, you need to prepare an exit strategy by then.

Facts and figures have been taken from http://www.admiralmarkets.com/education/articles and http://www.nasdaq.com/quotes/after-hours.aspx