Why Futures Traders Should Not Hold Day Trading Positions Overnight

Why Futures Traders Should Not Hold Day Trading Positions Overnight


This article on overnight futures trading is the opinion of Optimus Futures

Holding Positions Overnight

What Is an Overnight Position?

An overnight position is simply any position held beyond the market close. Later today, for example, the ES will stop trading at 5pm EDT. But “tomorrow’s” trading day begins an hour after close, at 6pm EDT. Confusing? It can be. There is no “overnight” close. The ES trades around the clock from Sunday 6pm to Friday at 5pm with one hour close at the end of each weekday. “Overnight” is a misleading term, simply because most commodities trade around the clock (24-hours) five days a week.

Many day traders, particularly new ones, make the mistake of holding positions overnight. Sometimes the mistake is unintentional, and other times it is intentional but poorly thought-out.

Here are some examples of unintentional mistakes:

  • Some traders simply forget to exit their positions before the market close.
  • Some traders–formerly stock traders–think there is something as an “overnight” period where futures contracts aren’t trading.
Now here are a few examples where the traded intended to hold positions overnight but shouldn’t have:

  • Traders who believe that the market will continue in their favor overnight but don’t have enough capital to cover the margin or potential losses.
  • Traders who try to make up losses by holding their positions, hoping that the market will move back in their favor.
  • Traders who intentionally hold overnight positions but on platforms that don’t show the previous day’s open positions (this is rare, but it happens).
Of course, the greatest risk in any of these scenarios is that you can end up in debit–owing more than you have in your trading account. Let’s go over the risks of holding overnight positions.

Holding Positions Overnight to Recover Day Trading Losses Is Bad Risk Management

Let’s go straight to the idea of recovering losses by holding positions overnight, since it seems to be a common blunder that many traders seem to make. If you’ve sustained a trading loss and you hold the position open hoping that it will turn around, then you may be in for a painful and sobering dose of reality.

First, there’s no guarantee that the market will turn back around. You know that. Second, if you’re already worried about losses–possibly a big one if it would compel you to hold a position overnight out of pure desperation–then the positive payoff (getting your position out of the red, possibly even making a profit) is much smaller than the negative payoff, which can be going into a debit situation–the proverbial “losing your shirt” scenario.

Capital and Leverage Effects of Holding Futures Overnight

As you should know, holding your position beyond market close automatically triggers a “full” maintenance margin scenario. So, if you were trading a single ES contract at a day trading margin rate of $500 per contract, as soon as you hold a position beyond 5pm ET, you now must hold a margin of $6,930 per contract–a 1,386% jump in margin requirements.

Imagine you had $10,000 in your trading account and you were trading 10 ES contracts for a total amount of $5,000 margin. If you held your position beyond market close, you would need $69,300 to keep your positions open! A massive jump in margin requirements.

Of course, no brokerage would allow you to take on such risks–because in the event of a debit, your risk becomes the broker’s risk as well. What happens next can be really upsetting, however necessary it may be.

Margin Calls and Extra Fees

In futures, margin calls are a courtesy…they’re also becoming exceedingly rare. If you receive a “margin call” from your broker asking you to exit your position, then consider yourself lucky. If you receive margin calls often, then reconsider your trading activities, as you may not be in a position to trade.

If you do not exit your position while being undermargined, the brokerage has every right to protect itself by exiting your position for you. It’s called “liquidation.” And it’s not uncommon for brokers to charge you a hefty fee, say, $50 or more per contract, for liquidating your position. So, imagine holding a 10-contract loss by market close, sustaining an even deeper loss when the market reopens (“overnight”), and getting dinged $500 dollars for liquidation on top of everything else.

Another thing to consider is that some brokerages have computer “auto-liquidation,” meaning that automated software liquidates your position once you are under margined.

Price Gaps When Trading Futures Overnight

One of the worst things that can happen to you is that the market reopens with an unfavorable price gap. Since most contracts trade 24/5, large gaps tend to occur with commodities that are reliant on pits (most trading pits are gone), or with any commodity at the end of the trading week (Friday).

Imagine holding a “long” open YM position at the end of the day on Friday. On Saturday, a presidential tweet signals that trade talks with China are not progressing as expected. Next thing you know, the YM opens at 6pm EDT Sunday with a 200-point gap decline. Unless you have a lot of trading capital, why risk such an event?

Best Futures to Trade Overnight (If One MUST Trade Overnight)

Is there a safer contract to trade overnight if you must do it, or if you want to place swing trades which can last a few days to a few weeks? Yes, there might be. Remember that overnight positions are mainly due to leverage and capital risks.

To answer the question, you need to either have enough capital to trade any contract of choice OR trade liquid Micro E-Mini Futures contracts.

See Related: Micro E-Mini Futures – Everything You Need to Know

Micro E-Mini Futures can help make overnight positions a more viable prospect. They are a smaller version of the standard E-Mini index derivatives for the following U.S. stock indices: S&P 500, Dow Jones Industrial Average, Nasdaq 100, and the Russell 2000.

The futures contract for each market gives the trader leveraged exposure to the underlying “cash” stock index to which the futures are correlated. In short, these derivatives are like trading a miniaturized version of an entire index in one contract.

These are “cash-settled” instruments. So, if you allow your contract to expire, say, for a purchased (or “long”) position, what you receive for delivery are not shares of stock, but its cash equivalence based on its market value at the time of expiration.

Their symbols:

So, how small are these contracts and how much do they move dollar-wise per tick?

Well, the value of each MES contract is $5 times the S&P 500 index; MYM, $0.50 times the DJIA index; MNQ, $2 times the Nasdaq 100; and M2K, $5 times the Russell 2000.

When it comes to the dollar value per tick (minimum price fluctuations), at these levels, the MES moves $1.25 per tick (per contract); and  the MYM, MNQ, and M2K all move $0.50 per tick (per contract).

Compared with the standard e-minis, which move, respectively, $12.50 and $5.00 per tick, the micros are relatively small, at a tenth of the value. And this is where these unique contracts may give you an advantage over their larger counterparts.

Bottom Line

Don’t hold positions overnight unless you have a good reason to do so (read: you know what you’re doing), and you have the capital resources to pull it off. Otherwise, if you have to hold overnight positions, trade a micro contract. You may not make a “killing,” but neither will the trader with a million-dollar trading account who conservatively trades only a few mini or full contract sizes.

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.

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