Overnight trading

Trading forex overnight has received something of a bad reputation in recent years due to the perceived difficulties that traders face making profits once regional stock markets have closed. Not only does this mean having to reverse sleeping patterns, which will not always be possible for those working during the daytime, but the sluggish movements of the overnight markets make it appear as a particularly boring time to look for trades. The incentive to trade forex during nightime hours is further reduced by the increased spread that many regional brokers apply as well as the lack of liquidity with the majority of active traders being asleep.

Opportunities to trade forex do exist overnight

Overnight trading, although not for every forex trader, provides a number of unique opportunities despite the wide spreads and slow markets. Of course, due to the 24 hour nature of the forex markets, when we talk of overnight forex markets there are still many currency markets which will be within market hours on the other side of the world and whose currencies cannot be considered as overnight. Those currency pairs, however, which share out of hours trading, such as the EUR/GBP EUR/USD for example, can be considered as overnight markets when both respective stock markets are closed.

Strategies based on support and resistance

For those who trade systematically using areas of support and resistance, the low number of active traders overnight mean that a large degree of the price movement is created through automated orders being executed as price typically remains within a sideways range. Many so-called ‘Expert advisors’ trade by scalping small movements at predictable areas of support and resistance such as Fibonacci and pivot point levels which often trigger a number of reversal orders. The low liquidity often allows price to react more reliably than they would if there were more active traders in the market. This can provide a good opportunity for forex traders to set their buy and sell orders at these levels without having to constantly monitor the markets overnight.

Getting ahead of other forex traders

An additional benefit to overnight trading is to take advantage of events causing price movements from the overnight active economies. Most day traders in Europe will wake up to the tail-end of market movements in Asia and the effect that overnight news has had on the value of currencies. Most traders will prefer not to hold open positions overnight for this reason but for those looking to gain an early advantage for the day ahead, looking out for key news announcements from central banks in particular can offer an early entry for a strong movement the following day. The interconnections between interest rates is important for all currencies and waiting up to see what the Bank of Japan decides can provide vital information on the short-term direction of currency pairs on the other side of the world. Whilst these currencies will still move overnight, the majority of the market reaction will begin when the European, UK and US traders take their positions the following day.