Strategies for Overnight Trading

01/28/2013 6:00 am EST

Focus: STRATEGIES

Rob Hanna

Co-Founder, Investiquant

Rob Hanna explains his strategies for buying on the close and selling on the open.

My guest today is Rob Hanna, and we’re talking about trading overnight, and he’s got a new system that he’s using.  We’re going to talk to him about that.  So, Rob, overnight trading… what do you do, and what’s the strategy here?

Basically, what I do is I break it down into three categories.  I look at price action, I look at internals, and I look at seasonality, and I’ve got some indicators that measure what the odds are for seeing a gap-up or a gap-down the next day, and then if you were to take a trade overnight what the profit factor would be, as well, so you’re looking at, it may have gapped up 55% of the time and the profit factor might be one-and-a-half based on price action, and it might be, slightly different than that with seasonality and then also with internals, and I take a measure of all three and that will give me an idea of whether I want to consider going along or not, and then the next thing I do is I also do specialized studies, so I’ll have a lot of studies similar to what I do with quantifiable ledgers where I’ll look at, okay, the market’s hitting a 20-day low, and it’s above the 200-day moving average.  How often has the market gapped up versus gapped down the next day? …and I take all that into consideration and make a decision on whether I want to go long or short overnight, or nothing.

Are you doing this with E-minis or indexes?  What are you doing?

I primarily trade E-minis with it, but I track ETFs, SPY, IWM, diamonds and the Qs, and then I also trade the futures contracts or the mini contracts for all four of those, as well.

All right, and so my understanding is you buy at the close, and then hold until the open the next day based on these indicators that say whether it’s going to gap-up or gap-down.  What about the risk there in terms in overnight news coming out, and that sort of thing?

Well, actually, that’s where you get a lot of the edge.  If you look at the S&P 500, just on the SPDRs, and you measure how much the market’s gained overnight versus how much it’s gained during the day from open to close, over the years what you’ll see is that all of its gains and more have actually occurred during the overnight session, and you get the moves overnight because the news happens overnight, and people will sometimes anticipate the news if they’re worried about an employment report, for instance.  They may sell the market down ahead of the report, and when the news comes out not as bad as people were afraid of, you get the pop-up.  But there are risks in trading overnight.  From my perspective, it’s not a lot different than trading during the day, though.  You can still use stops overnight if you’re using E-minis.  If you’re not using E-minis, you can’t use stops with ETFs, but it’s still that exit the next day, so…

Do you ever have any problem where it gaps below your stop, and you actually lose more than you had wanted to or…

Oh, yeah, that can happen.  Position sizing’s important, and so… but that can happen during the day, too.  You know, if you’re in a stock and news pending comes out, they hold up the stock, so stops are a nice security blanket, but they don’t always work as anticipated, and it’s the same with overnight trading.

So, briefly tell us what you’re looking at before the close that tells you whether or not to be long overnight that day.

Well, it’s… the three systems that I look at:  Price action, internals, and seasonality.

What specifically about those are you looking for?  Let’s just actually take one.  We’ll take the price action.  What tells you during the day of the price action that there is a good chance that it would gap up the next day?

Okay.  Well, basically what I do is I look at price action based on a number of different indicators, so I’ll be looking at where it is based on its long-term trend, on its short-term trend, and then whether it’s had any exceptional moves today as we approach the close, where the trading within the day’s range, within the weeks’ range, and so forth, and all of that gets put into some formulas that I have and run to compare it against other readings historically, and how has the market performed after similar sets of circumstances.

All right.  If I want to find out more about this, give us your web site.

It’s OvernightEdges.com

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