How Do Orders Execute Over The Weekend?

Trades executed over the weekend introduce a greater degree of uncertainty because of a long period of non-trading hours involved. Most dealers will warn trading clients of so-called "execution risk." Specifically, this refers to the risk that orders may not be able to be filled exactly at the price ordered, because of low liquidity, price gaps in the market and lags between client order entries and trades made upon the reopening of the market.

These risks may bring special considerations for trading around periods of market closure, such as weekends and holidays.

Weekend Trading Hours

Because it is decentralised, the forex market is technically open 24 hours per day and 7 days per week. However, most dealers close operations on the weekend, so liquidity in the market can become very thin. Trading hours for retail traders typically end at around 5 p.m. EST on Friday and reopen around 5 p.m. EST on Sunday.

Orders that aren't executed before closing of trading hours can be held over for execution at the opening of trading on Sunday.

Rollover

In trading during weekdays, positions are closed out for the end of the trading day at 5 p.m. and immediately re-opened with rollover. Rollover is an interest charge based on interbank interest rates of the countries of the two currencies being traded. Rollover may be positive, that is, paid out to the currency holder; or negative, requiring a debit from the trader's account, depending on the relative levels of interbank interest rates practiced in the two countries. Rollover is accrued at the end of every trading day on weekdays, and it doesn't accrue on Saturday and Sunday.

However, because forex is a two-day deliverable market, positions that are open Wednesday at 5 p.m. and are rolled to Thursday are paid or charged three days of rollover interest to accommodate for the weekend period. Instead of settling for a two-day period through Saturday when banks are closed, the interest accrual is rolled through the following Monday. Forex brokers and dealers will generally publish a calendar and table of rollover dates and charges. In addition to weekdays and weekends, these will also include rollover dates and charges for holiday periods.

Carry Trade

Because of rollover payments, traders can earn interest payments or "carry" by buying high-yielding currencies and simultaneously selling a lower-yielding currencies. This may be a viable strategy to earn money on interest differences when currency levels remain relatively stable. However, traders will want to verify whether the trends for the purchase and sale of the currencies will make a carry trade effort worthwhile before executing such trades.

Gaps

One of the biggest risks (or opportunities) for traders over weekends is a gap in price. While trading volume may not be large over weekends, prices can still move during that time. As a result, prices on weekends may show large gaps, or periods where price changes are not smooth and exhibit large jumps from one level to another. At times, prices at the opening on Sunday are near where the prices were on the close of the previous Friday. At other times, there can be a large difference between Friday's close and Sunday's open.

News Events

Often, the reason for a gap is that there is a news, economic event or announcement that takes place over the weekend that changes opinions in the market about how currencies should be valued. Because of this, traders maintaining positions and orders over the weekend need to be prepared for the possibility that the market could unexpectedly create a large gap.

Slippage

Because of low liquidity and the possibility for gaps over weekends, the potential for slippage—or the inability to execute an order at a requested price—is larger. Typically, if a price requested for a stop or stop entry order is reached with the open of the market on a Sunday, the order will be filled at the next available price. However, the order may undergo negative slippage if there is a large change in prices between Friday and Sunday.[1]

Market Range Feature

One way to mitigate the risk of slippage is to use market range or maximum deviation features available on some trading platforms. These features allow traders to indicate the maximum potential slippage they are willing to accept on a market order. The lowest level is zero, which indicates that no slippage will be permitted.[2]

However, traders need to remember that in the case of limited liquidity, orders may not be executed at the price sought. To raise the probability of having their orders executed, traders may elect to accept a wider range of permissible slippage on the market range feature, from one to several pips in size.[2]

Spreads

Spreads may widen during rollover periods, because of lower trading volume and liquidity. Thus, traders should be aware that they may pay larger spreads when trading near periods of low liquidity, such as the closing and opening of trading in on weekends.[1]

Summary

Trading around the weekend period from Friday to Sunday, or during holiday periods, may involve some extra risk because of low liquidity, unexpected news events, price gaps and slippage that can occur during these times. Traders who are operating on a longer time horizon, however, may want to maintain positions open in order to obtain advantages from rollover and carry trade. Because of this, traders will want to assess their particular time horizons and risk tolerance before entering positions that may bridge market closings during weekends and holidays.

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