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

Tricks for overnight success

It’s 4 a.m. An alarm rings in Chicago, and a hand slips out from underneath the covers to turn it off. Economic news from Europe will be announced in 30 minutes and it may spark a trading opportunity. A quick cup of coffee and the glare of the computer screens helps an early morning trader transition from sleep mode to trade mode. Starting time comes early, but if the setup is right, this trade can provide a profit before most traders wake up.

Most of us only look at the market between the times of 8:30 a.m. and 3:15 p.m. CDT. However, the rest of the world does not take the rest of the day off. From Europe to Asia and everywhere in between, different locales have control of the market while the United States rests.

Not only will following the market throughout the world give a trader more insight into what will happen when the U.S. market opens, but it also can reveal some opportunities. Though getting up early isn’t always easy, early bird traders stand to make a killing — if they know the right markets and techniques to put into play.

INDICATOR VACUUM

The biggest problem with trading in the night market is the lack of familiar indicators on which many traders have come to rely. The E-mini S&P futures, a nearly 24-hour market, open at 3:30 p.m. CDT and close at 3:15 p.m. CDT. Watching and trading the overnight market can offer a new avenue for profit and help in determining how the subsequent day’s market will perform, but figuring out what moves the market in a vacuum of news, information and common economic drivers can be baffling.

The key to understanding the night market is knowing who is controlling it.

The first major market to open following the close of the U.S. day session is the Nikkei stock index in Japan, followed by the Hang Seng stock index in Hong Kong. These are the two primary Asian markets. When they have the floor, they not only set the tone for the next day’s trading in U.S. stocks, but they push and pull the overnight E-mini market as well. Asia has its own economy and its own news, and how and when that news filters in affects where the market goes. The E-mini S&P 500 futures will follow these trends while Asia is open.

One word of caution, the Globex market (the night market) moves slowly. Unlike the day market in the E-mini S&P, which has an average range of about 25 points, the night market will move only about seven points, on average, in a 16-hour period. Compared to the day market, which is open only six hours, 45 minutes, patience is a necessary quality for traders participating in the overnight Globex market.

The first lesson most new night traders have to learn in this environment is, don’t be eager to get paid quickly. Though the night market can move like the day market during big news, you’ll generally feel like you’re watching paint dry if you try to follow it tick by tick. The best strategy is to wait for the right setup, get in the market, place a protective stop and go find something else to do, only checking in on your trade every now and then.

WHEN EUROPE WAKES

As the European markets begin to open at 1 a.m. CDT, more evidence of market direction can be seen. Germany has the largest economy in Europe and its DAX futures is a solid market to follow. Because of this transition, the E-mini S&P futures begin to follow the lead of the DAX futures during this time.

As with U.S. markets, it is best to give the DAX the first hour and a half after its open to allow it to find a direction. During this adjustment period for the DAX, the overnight E-mini S&P market also needs time to readjust from the waning influence of the Asian markets to that of Europe.

“DAX on stage” shows both the DAX futures and the E-mini S&P futures during the opening of the day market for the DAX. On this day, the E-mini S&P opened at 1327.75, had a high of 1331.50 and a low of 1317.50 before the DAX futures opened at 1 a.m. CDT and began heading lower.

After the first hour and a half of the DAX’s regular daytime hours, the E-mini S&P begins to retrace. The DAX initially refuses to move lower, but the E-mini S&P fails to hold up as the DAX gives way to the bears.

Further, if the trader had been watching Asia, they would have known that it was particularly quiet as it edged higher, with Europe opening lower based on Asia’s lackadaisical performance. Knowing this, the decline in the DAX can been seen as a correction in the wake of Asia’s higher prices. If the S&P would have taken out the overnight highs, the uptrend would have been confirmed in the market, but the resistance in the S&P held, giving caution to the long side and inspiring traders to be patient as the market consolidated before heading lower.

ON THE OPEN

One of the best trades in the DAX futures markets is made after the first 30 minutes of the German cash market. The DAX futures begin trading at 1 a.m. CDT, but the cash market does not open until 2 a.m. Though we must look at the global markets for confirmation, trading off the cash market’s opening range will normally pay a minimum of five DAX points.

With the DAX in sync with the global markets, “DAX done right” (page 46) shows this opening range. The Dax is worth €25 per point and trades in 0.50 point increments. Its opening range (first 30 minutes of the cash market) is from 7608.00 to 7589.00. Selling the DAX futures five points below the 30-minute candle (or buying it five points above the candle if the market goes higher) would, in this case, get you short at 7584.00. Assuming we were looking to make 10 points on the trade, a buy limit at 7574.00 got filled shortly after entry. The math works like this: 10 points on the DAX futures is €250, or $361 (as calculated on Jan. 22, 2008).

Most European news is announced between 3 a.m. and 4 a.m. CDT. Waking up at 2 a.m. every day can get tiring, but 4 a.m. may be a little more amiable to normal sleeping habits. Because economic news is almost always a market-moving event,

it often pays well to get up and see if the markets are moving off

European news (one reliable site for global overnight news is www.forexfactory.com ). Borrowing the same technique used after the DAX cash market opens, the previous 30-minute bar prior to news hitting the market can be used for an entry trigger. That introduces another concept that is important to consider for night markets. While most traders use one- or five-minute bars to trade short-term swings, consider a 30-minute bar to take the hash marks out of the market. Remember that the Globex market moves slowly during these periods and may have only a 0.50-point range during a 30-minute period. Individual one- or five-minute bars may show little movement during these periods, appearing as hash marks on the screen and obfuscating your analysis. A larger 30-minute bar will show a larger range and take the noise out of the market.

Trading at night can try your patience if you are not used to watching a slow market. However, as the sun moves around the world, more volume and volatility pour into the market, making it easier to get in and get out with a profit, but you have to know where to look and when to look there. It's not easy, but the work will be worth it for those nights when the world's markets agree, the odds of a good trade reach a critical mass as the DAX futures open, your domestic competitors are fast asleep and you're poised at the Globex screen ready

to pounce.

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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