Being a trader, we are often faced with a dilemma if we should hold on to our positions over the weekends. Depending on the time frame we are trading, our analysis may extend far beyond the 5-day work week.
With the markets closed over the weekends, we are unable to react to any news releases during that 48 hours. Market-moving news such as terrorist attacks and last minute economic policy changes have significant impact on asset prices. When these occur, any positions that are left open on Friday night are susceptible to price swings across the weekend and there is really nothing we can do about it, but to wait for the opening bell on Monday morning.
To quote an example, stock XYZ was trading at $50 on Friday’s close. Over the weekend, the authorities discovered some fraudulent accounting practices which has been hiding large losses in XYZ. A news like this would certainly cause the stock price of XYZ to collapse. However, the markets do not open during the weekends, and investors are unable to get out of their positions. The only time which they can sell their holdings is when the markets open on Monday. Prior to opening, there is a pre-market trading, where buyers and sellers would bid and offer the stock. The opening price will then be decided using an algorithm that deduces the average of these bids and offers. You may like to read more about the opening price here.
With the strong supply of stock XYZ before market opens due to the news over the weekend, opening prices would definitely plummet. If the opening price is $20 on Monday, an investor would have sustained $30 loss per share. That is a whopping 60% loss on opening bell. Such a loss could have been prevented if the position was closed over the weekends.
So, what can we do to reduce the possibilities of sustaining such losses? Personally, I do not hold my positions over the weekends, no matter what my analysis tells me. No amount of profit can ever make up for the possible losses I may sustain on Monday’s opening. While this advice may not be suitable for all strategies, an alternative would be to buy put options on your asset if you’re going long, or buy call options if you’re going short. This way, you are able to hedge your risk against any substantial movement. Of course, if all goes well, you can sell away your option with minimal impact on your profits.