Saturday, December 23, 2006

Overnight Trading

I'm struggling to develop a trading strategy which won't involve me staring at the market all day. The idea behind developing the "model"... But seems it is psychologically hard to just follow the model directions and leave a position on all the time until I have a reasonable cushion of profits from trading the model. This doesn't make any sense from the point of view of traditional neoclassical economics, but does make sense from the perspective of behavioral economics. Noting that overnight moves in the stockmarket tend to be much smaller than intraday ones (a well-known economic anomaly) I think I may have an alternative trading strategy:

1. At the close of each day place a trade as directed by the model.

2. In the morning observe the direction of the market from the 8:30am timing of most major U.S. macroeconomic announcements to about 11am.

3. If the market is moving in the direction forecast by the model take profits after a substantial move is made.

4. If the market seems to be going in the opposite direction get out fast.

For example, this morning the market was up slightly before the open but nothing significant. Then came the big fall after the open. Around 9:45am was the ideal time to cover the position. Or just where I decided to go long, a little later. This trade would have made around 13-14 points or $260-280 per contract. The clue that this is doable is that I decided to go long at NQ = 1775. So I'm capable of making the right decision in principle and just need to build that into a strategy.

Making a trade every day also makes it easier to take time out from trading. The psychological difficulty of this strategy is being disciplined to ignore the market for the rest of the day once I've closed the overnight trade. I'll call this strategy "overnight trading" as opposed to "day trading" :)

Of course if the market appears to be in a very strong trend it would make sense to place a stop and let the trade run after observing the morning conditions. This might be easier if I trade say 2 contracts and close one in the morning and let one run if conditions look favorable.


Anonymous said...


Why don't you just trade your 1 position and once you are happy with your profit percentage complete the trade and do whatever you want. Personally being disciplined to be happy with what you can make in the market is key to success. You can't get more out of the market then it will give you. Have you considered just trading less and increasing your percentages to equal what it would be to be 1 trade a day. Like trading once a week = 4-5 trades worth? My disciplined mission is to just find 1 well thought out trade a month to cover an entire months profits for 4-10 trades. The hard part is basically being right about that 1 trades move is big enough to cover the entire month. Being wrong is being broke in my case =D

mOOm said...

The model tends to make 4-5 or so trades a month. As you write, taking too much risk is bad and leads to bad decision making. I'm trying to find a trading strategy that utilizes my edge and works well with both my schedule and psychology. The latter two are the issue now. The edge isn't in question. Writing down a strategy of this sort should help with executing it in some psychological way I think.