Forex Mistake #14 – Weekend Expenses: Swaps and Gaps

Why Letting Your Trades Remain Open Weekend Could Get You Broke?

On top of spreads, trading Forex has additional expenses and every trader should be aware of that. One such expense materializes in the form of a fee called swap which will be charged if a trade is not closed at the end of the day. The longer we keep the position open the greater the cost and the so called carry trades (on pairs that provide positive swap) are quite rare these days. This is one of the reasons why I prefer to trade intraday – meaning I open and close the trade within the duration of the same day; trades that are kept weeks or months enter in my sphere of interest only when very strong trends are in place but I try to avoid them altogether.

 

How Letting your Trades Remain Open Could Get You Broke?

Keeping trades open over night or even worse, over weekend has some disadvantages: the Forex market closes on Friday with the American session and opens early in the morning on Monday with the Australian session. Meanwhile, different economic events could occur or news could come out and destroy your trade by creating the so called “gap”, a sort of black hole that feeds itself with your money. This price behavior appears on the chart as exactly that: a gap of price, with the possibility of appearing either to the upside or to the downside and I was caught in one with three trades open over the weekend. On Monday morning a “splendid” surprise: market opens with a 100 pips gap on average on all three trades, all against me… red across the board. This doesn’t happen very often, but it’s more than enough to catch you uncovered once and you will remember the exploit for a long time. The reverse is valid also: this time Fortuna, the goddess of luck was on my side and the gap appeared in my advantage, yupee!! And your enthusiasm blows through the roof! When luck came on my street I had just one position open not three, so per total I was still losing the game. How come we almost never make huge mistakes in our advantage? I have no explanation for that, unfortunately. The problem with these gaps is that they are highly unpredictable and there’s no way of knowing when and where they are going to appear. We can find explanations just after the facts already occurred.

 

I started trading during the financial crisis in 2008, when huge volatility was in force. These were times when large fortunes were made and huge riches were scattered. Sharp moves of the market were something more than common, moves that I sincerely miss these days, when the monotony is queen and slow, flat movements describe a boring situation. When the market designs large rallies, dramatic and sharp evolutions, even if the risks are considerably higher, it’s worth sometimes to keep trades over night or over weekend, but only if you are experienced enough, your account has a comfortable level and the forecasts predict a strong direction of the trend. If there is enough volatility you may have the space to counterbalance the supplementary costs, if volatility is low or absent, the odds are not really on your side. However, for beginners, having trades open over the weekend is a risk assumed and implies additional costs: first the swap and then the potential gap. Overcoming the stubbornness and the “ I know better”, “ I don’t believe it until I see it” will cost big money and frustration. In Forex we have the bad habit of completely ignoring the advice of the more experienced traders, we have this damaging tendency to test everything on our skin and on our pocket, or at least I did.

 

Conclusion: The Market Closes and I Close My Trades

Over the years I arrived to the conclusion that it’s a smart choice – otherwise preached by a large number of experienced traders – not to have trades open during the weekend. I sleep better and spare myself a heart attack, I am not paying fees just because time passes and unscheduled events have no impact on my trading account. And since we live quite turbulent times, a war here, a war there, some insane presidents with expansion ambitions, it’s preferable to play it safe and avoid useless complications.  Most of the gaps will be closed at a certain moment, meaning the market will return to the level where the gap initiated but I don’t rely on that for the simple reason that a few weeks (or sometimes more)can pass until the gap is closed.

 

Finally, keeping the trades over weekend is a personal option and an assumed action which depends dramatically upon the particular situation and expectations, but experience demonstrates that it’s something that should be done as rarely as possible. Don’t waste your funds on swaps or gaps.

 

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