Trading in the foreign exchange market involves various risks. An often neglected risk is the so-called “weekend risk”.
In contrast to the stock or bond market, the foreign exchange market is the only market where trading takes place around the clock during the week. From Sunday evening (8am in New Zealand) to Friday evening (5pm New York time), trading in the foreign exchange market is possible without any interruption.
Economic data and other news that influence the expectations of the interest rate level of a certain currency and thus the exchange rate are usually converted into corresponding buy and sell orders in the shortest possible time (in fractions of a second in the case of computer algorithms). Between Friday evening and Sunday evening the foreign exchange market remains closed and therefore cannot react to corresponding news.
Market participants who hold positions over the weekend thus expose their capital to so-called “weekend risk”. This is a not inconsiderable risk, since in the rather illiquid trading on Sunday evening (New Zealand 8am tomorrow on Monday), after corresponding news over the weekend, prices often occur that deviate significantly from the closing price level on Friday evening. Existing stop-loss orders are thus executed at a completely different – usually worse – price than planned. If the trading position is too large compared to the account size, even the entire trading account may be at risk.
The Cyprus Crisis 2013
One currency that has opened with relatively frequent price gaps in recent years was the British pound in the context of the brexite discussions. There were frequent headlines over the weekend. But the Euro is also not immune to extreme exchange rate gaps – on the contrary.
EUR/USD is the most liquid and most traded currency pair worldwide. However, important news over the weekend can also lead to some extreme price gaps. A relatively blatant example of a 163 pips (!) gap occurred 5 years ago in March 2013 in the wake of the Cyprus crisis.
On Friday the 15th, the pair exited New York trading at $1.3077, and the first price that came in late Sunday evening was down more than 160 pips to $1.2914. A possible stop-loss order for a long position at $1.3000 USD would have been executed just over 85 pips below the level that was originally planned.
Italy in May 2018
There have also been larger gaps in the EUR/USD on Sunday night in the recent past – though not of the magnitude of March 2013’s. The EUR/USD closed at $1.1649 on Friday night, May 25, 2018, to open at $1.1683 on Sunday night – an upward gap of no less than 34 pips (see last month’s hourly chart below).
The weekend risk will not diminish in the coming weeks and months and should be firmly anchored in the consciousness of every forex trader.
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