Overnight Trading: What it is, How it works, Benefits and Examples

6 min read

By Chainika Thakar

Overnight trading is as interesting as it sounds. In trading, just like in life, it is always good to know that there are open opportunities even after the specified time period.

Overnight trading provides those opportunities to the traders who want to take the trading positions after a thorough study of the market during the day. The overnight traders (going by that day’s market performance) speculate for the next trading day and place their orders after the market closes.


What is overnight trading?

Overnight trading implies buying and selling financial instruments in between the hours when the stock market closes and opens the next day. The trading decisions, in overnight trading, are based on the performance of the market during the day.

If a share’s price shows a positive trend throughout the day, it is most likely that the share’s price will open at a high the next day. Hence, you would want to sell that share once the market opens the next day.


Why to do overnight trading?

Overnight trading is opted for by the traders for the reasons such as -

  • Simply not wanting to speculate and trade throughout the day
  • Not having enough time during the day for trading
  • You have speculated that a significant change might occur in the market the next day seeing a global event having had taken place during the non trading hours

Example of overnight trading

Overnight trading is done in the hours when the market is closed by placing an After Market Order (AMO). An AMO is placed between 4 pm to 9 am for NSE, BSE, NFO and currency segments.

There's a pre-opening session from 9 am to 9:15 am and a post-closing session after 3:30 pm which goes up till 4 pm. And then the trade position is attached to the market opening time on the next day.

Below you can see how overnight trading happens with the example of AAPL Inc. stock. Since the market closes at 4 pm, the trade positions that are taken after that are all considered overnight trading.

Overnight trading
Overnight trading

Who can do overnight trading?

Well, overnight trading can be done by anyone and everyone who is a trader but usually, only a few traders’ orders get executed because -

  • All the orders that are placed during the non trading hours get accumulated and not all get pushed for execution when the market opens the next day.

In other words, since the exchange receives a lot of orders for being pushed in the overnight trading, it is not possible that all of them get executed.

  • There are only a few brokers that offer overnight trading features and hence, it leads to a wide bid-ask spread most of the time. It implies that the buyers bid low prices whereas the sellers quote high prices.

Is overnight trading beneficial?

It is usually observed that overnight trading gives more returns (if speculated properly) than trading during the market hours. There are a lot of other benefits which you can see below:

  • One of the most critical benefits is that you have the ease of trading whenever you want and not only during the market hours. It is really helpful when you usually remain occupied as a professional and it is difficult to manage time to take trade positions while following the market trends simultaneously.
  • You can analyse the market performance of the day and can base your informed trading positions on the same.
  • You are always free to modify your order or cancel the same during the non-trading hours if you decide not to go through with the same.

How to do overnight trading?

Traders, usually, study the market performance throughout the day (during the trading hours) and when the market closes, they take the trading positions and place their orders. These orders are executed the moment the market opens.

For example, the Nasdaq stock exchange, on which AAPL is listed closes at 4 p.m. and opens at 9:30 a.m. The overnight trading commences at 4 pm and takes place till 9:30 a.m. (the next day).

In India, there are two major exchanges i.e., BSE and NSE.

For equity trading, the overnight trading hours are from 3:45 p.m. to 8:59 a.m. for BSE. The overnight trading hours for NSE are from 3:45 p.m. to 8:57 a.m.

For currency trading, the order can be placed for overnight trading (AMO) between 3:45 p.m. and 8:59 a.m. For trading derivatives such as futures and options (commonly known as F&O), the overnight trading hours are between 3:45 p.m. and 9:10 a.m.

Overnight trading can be done with the help of a broker such as Zerodha, Ameritrade, Fidelity, etc. The broker charges a premium or the interest payment, usually known as an overnight trading fee for holding the position overnight.

Note - The individual must check with their respective broker or the service provider for details.


Difference between intraday positions and overnight positions

The difference between intraday positions and overnight positions can be highlighted as follows:

Intraday trading positions

Overnight trading positions

There are no carry forward risks on the trading positions and the trade positions take place during the trading hours.

There are carry forward risks as the positions are taken after the trading hours.

The trading positions are taken immediately on the market behaviour during the day (in the trading hours).

The market behaviour of the day is taken into consideration for taking the trading positions for the next day’s trading hours.

You can speculate the buy or sell while trading simultaneously. There is no need to place an order scheduled for a later time period.

An After Market Order (AMO) needs to be placed for overnight trading positions. An AMO implies an order that is scheduled for being executed later (when the next day’s market opens)


Precautions to take while taking an overnight position

Overnight trading is not free of risks. There are a lot of overnight trading related risks that a trader needs to be cautious about, namely:

Speculation mismatch with an unanticipated global event

For instance, let’s assume the sudden death of the MD of the company.  A trader can enter the market believing that the stock’s price will rise, but, due to the significant event, the price goes against speculation and decreases. In this case, the losses will be booked for that trade instead of good returns.

No feature available for limiting the losses

Also, while AMO allows you to cancel or modify your order, you cannot limit your losses. Stop-loss orders, which help curtail your loss, are not applicable on overnight trading. So, you cannot place an AMO with a stop-loss order that the order is placed only when the stock prices drop below a certain amount.

Release of the financial statement leading to an increased price gap

When a company issues its financial statement, or any economic data is released, the price gap goes up during non-market hours as there is very little liquidity. This could impact your AMO adversely since the market gets volatile.

Uncertainty regarding the order execution

Another point of concern is the uncertainty regarding the execution of the AMO since the exchange receives a lot of orders from all the overnight traders all at once wanting to take the opening position. This can lead to piling up of orders and an issue in getting all the orders pushed.


Conclusion

Overnight trading is a simple concept but a trader must speculate carefully. The speculation must be based on the factors such as a global event affecting the market, the earning announcement of a company etc.

Overnight trading is either practised by many who need to rely on the non-trading hours due to other commitments throughout the day or those who wish to analyse the market throughout the day for opening the trade the next day.

If you wish to learn about doing overnight trading with the help of algorithms for gaining an edge in your trading journey, then you must pursue a well structured course created by industry experts to get started with algorithmic trading. Do check it out!


Disclaimer: All investments and trading in the stock market involve risk. Any decision to place trades in the financial markets, including trading in stock or options or other financial instruments is a personal decision that should only be made after thorough research, including a personal risk and financial assessment and the engagement of professional assistance to the extent you believe necessary. The trading strategies or related information mentioned in this article is for informational purposes only.

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