Mechanism
Overnight holds incur financing (swap/roll). The cost can change with rates, instrument, and broker policy.
Even if price goes nowhere, financing can erode P&L. In some instruments, financing can dominate the expected move.
So the time dimension is part of the edge.
Microstructure note: stops fail most often at the same time liquidity disappears. That is not bad luck; it is structural. Your job is to avoid competing for fills in the worst queue.
- Prefer “don’t trade” windows over cleverness: rollover, open/close, data prints.
- Reduce size before you reduce stop distance. Size is the only lever that always works.
- Measure slippage by regime, not by average.
How it kills accounts
Hold because 'it will come back' → time passes → financing accumulates → account bleed → forced close at the worst time.
How it kills accounts:
- Edge looks fine in backtest.
- Live spreads widen at the exact wrong moments.
- Stops trigger inside noise, so you widen stops.
- Same size + wider stop = silent leverage increase.
- A normal spike becomes structural damage.
Rule that survives
Before holding overnight, estimate financing for the worst holding period you might tolerate.
If the thesis requires time, financing must be part of the thesis.
If you are holding because you don't want to realize a loss, time is not your friend.
Rule that survives:
- Spread is a gate, not a footnote. If it’s abnormal, you don’t trade or you trade smaller.
- Assume worst-case fills in fast markets.
- Size is the adapter: reduce size before changing the stop model.
Example archetype
You hold a position for two weeks waiting for mean reversion. Price is flat. Financing quietly turns the trade into a loss. Your thesis didn't fail; your time cost did.
Tell: if the trade only works when the spread is tight and price is smooth, it’s not an edge, it’s a regime bet.
Deep dive
Design note
Time is an input. Treat financing like spread: a cost you must overcome.
Glossary: carry, swap/rollover, opportunity cost.
Field checklist
- Measure spread before entering. If it’s abnormal, you’re trading the wrong product at the wrong time.
- If volatility expands, reduce size first. Don’t “solve” it by widening stops with the same size.
- Avoid the predictable liquidity holes: rollover, session open/close, first minutes after data.
- Assume your stop may fill worse than your entry. Price the worst-case, not the brochure.
- If you cannot explain where liquidity comes from, trade smaller.