The Gap That Changes Everything: Sizing for Overnight Risk

The Overnight Problem

Markets close (or become illiquid) overnight. When they reopen, price can gap significantly beyond your stop level. A trade with a 1.5 ATR stop can lose 3 ATR or more if the market gaps through the stop. Standard position sizing assumes stops will be hit at the stop price. Overnight, that assumption breaks.

S30 reduces position size by 40% for trades that will be held through a market close. For FOREX (which trades nearly 24 hours), the reduction is only 20% for the Friday close to Monday open gap. For equities and indices, the nightly close triggers the full 40% reduction.

The 60% Loss Reduction

Applying overnight sizing reduction to the backtest showed a 60% reduction in gap-related losses. The average overnight gap loss dropped from 0.8R to 0.32R. Most of this improvement came from equity and index trades where daily close gaps are more frequent and larger.

FOREX overnight adjustments had a smaller impact because the 24-hour market structure means most "overnight" periods still have some liquidity. The Friday-to-Monday gap is the exception, and S30 handles it with the larger reduction.

Sizing Down Is Not the Same as Closing

Some systems close all positions before market close to avoid gap risk entirely. S30 takes a different approach: keep the positions but size them appropriately for the risk. The reasoning is that many of V7's best trades are multi-day holds that capture trending moves. Closing everything at the end of each day would eliminate these winners. Reducing size preserves the opportunity while limiting the damage from adverse gaps. The 40% reduction factor was calibrated from historical gap distribution data. At 40% reduction, the expected loss from a gap event is brought within the same range as a normal stop-out, maintaining the position while normalizing the risk.