From the February 01, 2008 issue of Futures Magazine • Subscribe!

The other side of midnight

BENEFITS

After-hours trading is valuable for several reasons.

First, electronic markets expand your trading universe and, therefore, the opportunity you have at your finger tips. There are so many more products to trade now than there were just a few years ago. Those of us who traded in the 1980s could not have imagined, for example, that we’d someday be able to trade a German stock index from a house in Mobile, Ala., at 2 a.m. if we so choose.

Second, information gained from after-hours markets is valuable and can improve your trading during the regular day’s session. For example, before you place your first trade in the morning, you can check the world’s sentiment. You can check the Nikkei, the Hang Seng, the Dax, the FTSE, the Cac 40 (Paris), and the Swiss exchanges. Once you have determined whether the rest of the world’s traders are bullish or bearish, you will be better able to prepare for the U.S. opening.

Third, after-hours markets are great places to hedge positions or trade after-hours news. For example, if a major world event occurs after the trading pits are closed, an after-hours trader can log-on and buy or sell as needed to hedge. Or, you can trade to take advantage of the news. If the news is viewed by the world as positive, the markets will respond and soar upward. After-hours traders can profit from the move. If bad news is aired, these effects also will be reflected in after hours. Those who know how to ply their trade can go short and make money.

Finally, these markets are simply self-contained opportunities for profit. “Overnight opportunity” charts the time-and-sales data of E-mini Nasdaq 100 futures during a one-hour period before dawn on Dec. 14, 2007.

Trading the night markets opens up a world of possibilities. Those of us who were early adopters of this technology, dating back to the first Globex terminals, have been fascinated ever since. However, the early practices of hiring extra eyes to watch the terminal while you caught a few winks of sleep on the office sofa were short-lived; that’s not the right way to approach overnight trading.

There are several reasons to trade after-hours markets. It may provide the best opportunities based on your work schedule or daily routine. There are opportunities and reasons to trade both U.S. markets during overnight hours and non-U.S. markets overnight, during their most liquid period. It is important to remember to distinguish the two. Your approach to position sizing, risk management and stop placement should vary significantly depending on whether you are trading a market during its most liquid time or during that market’s off hours. Typically there will be wider bid/ask spreads and less overall liquidity during off hours, which must be factored into your trading plan.

Enjoy trading after hours, but do not become obsessed. Always save time for relaxing and clearing your head. Before jumping into the after-hours game, observe, study and learn. Mistakes and errors in the after-hours market are just as expensive as any other time of day. Take your time, and start slowly. Learn as much as possible before putting money at risk. Next issue, we’ll look at some strategies for tackling these after-hours markets.

Tom Busby is a 30-year professional trader and founder of DTI, a trading school in Mobile, Ala. Busby has been seen on Bloomberg, CNBC and BNN. For more on Busby go to www.dtitrader.com.

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