Hold Forex Trades Through the Weekend, or Close Them?
Cory Mitchell, CMT
Each weekend, forex traders are faced with a decision. Swing traders do hold positions overnight, but weekends present additional risk. Day traders close their positions daily, so they won't have any trades.
During the week the forex market doesn't close. It has a brief lockdown for a few minutes at 5 pm EST, but other than that there are typically no price gaps because there is constant trading Sunday night through to Friday afternoon (Eastern standard time).
Considering Weekend Gaps
At 5 pm EST on Friday the forex market closes and doesn't reopen until 5 pm EST on Sunday. This creates the opportunity for price gaps—when the opening price on Sunday is significantly different than it was at the Friday close.
A gap can go both ways. The price could gap in your favor improving your profitability, or it could gap against you.
Gaps usually aren't much of a problem. They are typically small and often not even noticeable on a daily chart.
A problem occurs when there is a gap through a stop loss. Assume a trader bought the EURUSD at 1.1050 and placed a stop loss at 1.10. They are risking 50 pips. The price on Friday closes at 1.1025, 25 pips away from their stop loss.
On Sunday the opening bid price is 1.0950. The trader's order is executed at 1.0950, because it is the first price available at 1.10 or below. The trader has now lost 100 pips instead of the 50 they planned. Not devastating, but not ideal either.
The bigger the gap the bigger the potential problem.
Let's say the trader was short as at 1.11 and had a target price at 1.10. The offer price at the close on Friday is 1.1030. On Sunday the market opens and the offer price is 1.0960. The trader's limit order to buy will fill at 1.0960, because that is the first price to buy at below 1.10. In this case, they make an extra 40 pips.
Friday Closing and Sunday Opening Spreads
Another thing we need to consider before we can decide to hold through a weekend is how the spread widens in nearly all currency pairs heading into the Friday close and at the Sunday open.
Starting at about 2:30 pm EST, and especially by 2:54 pm EST, spreads start to widen. This can be drastic in some pairs, but will vary by broker. A pair that usually has a 3 pip spread may widen to 50 pips. [Day light savings time may alter some of the times discussed; check for opening and closing times based on your own time zone].
When I say "vary by broker" I mean it can vary drastically! I am looking at quotes from a Friday close, and some brokers are quoting a 10 pip spread in the EURNZD and other brokers are quoting a 70 pip spread, just as an example. GBPCAD has an 8 pip spread near the Friday close with one broker and a 43 pip spread with another. EURUSD has a 3.3 pip spread, while another has nearly a 20 pip spread.
During regular hours, these brokers may quote a very similar spread, like 0.2 pips in the EURUSD. But in late trading Friday and early trading Sunday you can see much larger spreads than usual, and some brokers are way worse than others.
Wide spreads during this time can trigger your stop loss orders (less likely to trigger limit orders) because as soon as the stop loss price (or worse) is shown on the bid or ask, that stop loss order will be executed.
Sunday, from 5 pm EST till about 6 pm EST, spreads can also be very wide, gradually narrowing over the hour and then looking a little more normal after 6 pm EST.
Ideally, we don't want to be stopped out just because the spread widens. When the spread narrows again, the price may not have changed much.
The spread can be a killer at these times, so we need to account for it when determining whether to hold through the weekend.
How I Determine Whether to Hold Through a Weekend
Given that spreads may widen significantly heading into the Friday close, and they are also wide when the market re-opens Sunday, I want to make sure my stop loss is far enough away that I won't get triggered by the spread widening.
Therefore, if my stop loss is inside 40 pips from the current price before the spread starts widening, I will typically just close my position before the weekend. I can always re-establish another position next week.
40 pips is just a guideline for majors pairs like the EURUSD, GBPUSD, and USDJPY. For other pairs you may want to use a guideline like 20x the normal spread. For example, in a pair where the spread is 5 pips, you probably want at least 100 pips of room.
This also helps avoid the situation of having the price gap through your stop loss order. 20x the spread isn't a big move. Most pairs move much more than that in a day. But it at least makes sure your stop loss is giving some room for the spread to widen or gap a small amount.
For reference, most weekend gaps in the EURUSD are under 50 pips. Between 1999 and 2017, there were 7 weekends with gaps over 100 pips, but none more than 150 pips. That doesn't mean a bigger gap can't occur. Large gaps typically occur on big news announcements, some of which are published in advance on an economic calendar.
So with a 40 or 50 pip stop loss (at least), most weekends will be fine, and occasionally we may lose (or gain) a bit more than expected. Position sizes should not be so big that losing 2x or 3x times what you expect (in very rare cases) will seriously harm the account.
Here are some other guidelines to consider.
- If the current price looks very close to the stop loss on a daily chart, close before the weekend. You're probably going to get stopped out anyway.
- If the price is very close to your profit objective, close before the weekend. Taking most of the profit on a trade is better than taking on the gap and spread risk of a weekend trade.
- Never hold a trade through the weekend just for the sake of holding it. Your strategy must indicate you are supposed to be in that trade.
- Create rules in your trading plan for how you will handle a situation where you have a valid position heading into the weekend. Create rules that stipulate the conditions under which the trade will be closed and conditions for which it will remain open.
- If you have a profit on the trade, and your stop loss is a trailing stop loss, this provides a bit more flexibility, since even if the price gaps through your stop loss a bit, you still have a profit. Don't use this an excuse to ignore the guidelines above, but if the trade is on the "cusp"—my trailing stop loss is 30 or 35 pips away on the EURUSD—I am more likely to hold that trade through the weekend, especially if the trend is still strong in my favor.
- If in doubt, close it! You can always get back in. No trade is worth losing sleep over. If we lose sleep over a trade, we typically don't understand it, don't have a well-defined strategy, or we are risking too much. But if you don't like holding through weekends, put this in your trading plan, and never hold through weekends.
- There is nothing wrong with NOT holding through a weekend. I didn't hold through weekends for many years of my career. Some strategies work well with holding, especially longer-term trades (based on daily and weekly charts). For other strategies, especially shorter-term trades, closing is a viable option.
What I Do When I Opt to Hold Through the Weekend
Most of my work is done. When I go through the above steps prior to the weekend, I can sit back and relax. I've given my trades enough room, and if they get stopped out, oh well. There isn't much I can do about, losing trades happen.
There is a scenario where I need to take one other step.
Say I am short the EURUSD and my trailing stop loss is 30 pips away, and I have a nice profit on the trade already. I am going to hold that trade through the weekend if it still has further to go based on my analysis or profit target.
I may even hold it if my stop loss is closer, but only if the trend is strongly in my favor.
When this happens, I may cancel my stop loss order, and then make a note that I need to be at my computer on Sunday at 5 pm EST to re-establish it.
This is to avoid getting stopped out by the widening spread. Come Sunday though, I need to re-establish my stop loss, and if the price has moved through it, I get out. I tried to squeeze more profit out of the trade, and it didn't work so I get out and don't give it a second thought.
This takes a lot of discipline. I am still going to get out if the price moves through my stop loss, but I am avoiding getting stopped out just because of the temporarily widened spread.
This may not be advisable for everyone. It is what I do.
Hold Forex Trades Through the Weekend? Summary Points
Only hold trades through the weekend if your strategy allows it.
Create rules around when you will hold and when you will get out. Longer-term trades may be worth holding, while shorter-term trades may be better closed.
Spreads are wide in late Friday and early Sunday trading. If holding, better to have the stop loss at least 40 pips or 20x the typical spread away from the price before spreads widen (minimum). In not, just close the position.
If I am in profit and using a trailing stop loss, I may hold a trade through the weekend if the distance between my trailing stop loss and the current price is less than 40 pips (or 20x spread). The trend direction must be strong in my favor. I will typically cancel my stop loss and make sure I am there at 5 pm EST on Sunday to re-establish it or get out if needed.
By Cory Mitchell, CMT
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.