Two Early Morning Trades

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Two Early Morning Trades

January 12, 2020

These are two trades that I took in the early morning on November 28, 2020. (My previous post, dated December 30, 2020, explained a trade I took the afternoon of that same day.)

My first trade occurred at 3:50AM EST and is denoted by the red arrow, showing that I took a put option. I based my trade on the 1.2934 price level when I saw price holding pretty well between 3:10-3:15AM and again between 3:30-3:45. The price action showed consecutive dojis, which demonstrate rejection of price moving beyond a certain point. To me, this indicated that we were at a “supply zone,” where the buying activity doesn’t overcome the selling and a resistance level forms. On the 3:50 candle, I decided that there was a good chance that price would continue to hold at 1.2934 so I took a put option. By the 4:00 expiry, I had about a six-pip winner.

After that, price never did get back up to the 1.2934 resistance level that morning. The retracement that began around 4:30 was weak so I figured it would most likely be a day where the Euro would depreciate against the U.S. dollar. At the very least, I figured it would come down to hit one of the daily pivot lines located at 1.29029. I did not, however, choose to take a call option trade once it hit that level.

Daily pivot points are good tools that can be used for those who trade on shorter timeframes – e.g., binary options traders and forex scalpers – as a way of finding areas where price is likely to reverse. However, we had been in an overall downtrend for the morning, so I decided not to take a trade against the trend. Moreover, a 23.6% Fibonacci retracement level was only a matter of three pips or so above the pivot line. I don’t take trades into areas of close resistance (usually what I define as ten pips or less for 5-20 minute expiries). As seen on the chart above, prive hovered between the pivot line and 23.6% Fibonacci line for about forty minutes, before continuing it’s downtrend. That was expected. Price was clearly reluctant to go back up, so a strong break of the pivot level is the most logical outcome after a period of such tight ranging activity.

Now you could be thinking, if I felt that this currency pair would be most likely to go down, why hadn’t I taken advantage of this by taking any put option trades? The truth is that I’ve never had much success with taking random entries with the trend. I’ve always needed to base my trades on some sort of support or resistance level. Even when I’ve been correct in guessing the general short-term trend and have made trades based on this sentiment, I’ve lost quite a few of them because of the small retracements that come in the context of a downtrend. I decided that my next trade, if I were to eventually take another, would potentially come on another put option if price retraced back up to the 1.29029 pivot level.

My second put option for the morning came on the 7:20 candle when 1.29029 eventually resurfaced. The main factors supporting this trade were that the trend had been down and price had shown sensitivity to the 1.29029 level only about a half-hour earlier. Therefore, it had a pretty high probability of working out. The trade actually turned out to be a very marginal winner (less than one pip), but fortunately it still won nonetheless.

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And that was it for the morning. Just two trades nearly four hours apart. Patience is essential. So much money is lost simply because traders want to make money quickly and believe that trading more is essential to boosting the account balance. Always ensure that you trade only the best set-ups and with small investment sizes to ward off the negative effects emotion can have on one’s trading performance.

Two Ways to Increase the Probability on Early Morning Trades

When trading futures, stocks, ETFs or watching indexes–directly or via a binary option–the early morning trades often present the best opportunity. When the market opens orders flood in, creating volatility and profit potential. While I’ve read some trading books that say to avoid trading near the open and close of a market because it is too volatile, I could not disagree more. On the contrary, myself and almost every other professional trader I know makes nearly all their money near the open and close. Patterns are pronounced at the beginning of the day, because the moves are sharp, swift and often of large magnitude. This can kill traders who don’t know what they are doing, but with a couple ways to increase the probability of picking good entry points, hopefully you’ll start to like the market open as much as I do.

Before you can increase your probability of find a good entry, you need a strategy. Here is a very simple one.

Before the market opens you’ll set up support and resistance zones. These are price areas at which the stock or future you’re watching is liking to reverse or “bounce” off of.

Given that we are trading the open, this is a day trade, and using a 1or 2 minute chart is recommended.

The first thing we look for is a gap in the price, from yesterday’s close to today’s open.

Figure 1 shows a gap in the S&P 500 Index, which is used for demonstration purposes.

Figure 1. S&P 500 Gap – 1 Minute Chart

Once there is a gap we place a support or resistance zone, which will be near the previous day’s close. Since the market rallied higher off the open in Figure 1, the price area around the previous close is called the support zone. If the market had fallen away from the previous close, then the price area around the previous close would be a resistance zone.

Figure 2 shows the support zone created by the previous close. I generally use the last several minutes of the previous session as the support/resistance zone.

Figure 2. S&P 500 Support Zone – 2 Minute Chart

The goal is to go long/buy calls when the price is near the support the zone. Similarly, go short/buy puts when the price is near the resistance zone. In the case of Figure 2, we’d be buying calls…but when? That is where the probability enhancers come in.

Enhancer # 1: Make Sure the Price Leaves the Zone Before Making a Trade

Look back to Figure 2. In real-time the price could easily keep falling right through the support zone we’ve drawn. The support zone is a price area I usually expect the market to stall and reverse–near the previous close after a gap–but that doesn’t mean it always will.

Therefore, wait for the price to enter the support/resistance zone, or just touch it, and then begin moving away from it before taking a trade. So In figure 2, you’d commence the long/call trade once the price is moving higher out of the support zone. This shows that at least temporarily the support zone is holding and the price is likely to rise. Figure 3 shows a zoomed in version of the prior charts. It shows the entry occurs as the price moves back out of the zone, as the zone looks like it will cause a reversal. If the price falls right through the zone, no trade is taken.

Figure 3 – Entry Point

In the case of a resistance zone, you’d enter short/buy puts once the price begins to fall back away from the resistance zone.

Enhancer # 2 – The Reversal Should Occur Quickly

In Figure 3 the price enters the support zone and within a couple bars it is already moving back out. While this support zone is relatively small–only about 1 point–some days the zone will be much bigger due to volatility near the close on the previous day (remember, the zone is created based on the last few bars at the previous close). Regardless of how big or small the zone is, the price shouldn’t stay in the zone for long. We want the price to bounce off the support or decline off the resistance zone within several minutes of getting close to it.

The sharper the reversal near the zone the better. Take Figure 3 for example. At a support zone you are expecting buying interest to enter the market, so if the price moves sharply higher near a support zone it shows that indeed there is buying interest there and going long/buying calls is the right choice. Similarly, at a resistance zone you expect selling/shorting, so when the price declines sharply off the zone it shows there is selling pressure and you want to be short/buying puts.

These Enhancers Can Be Used For Other Strategies

While these enhancers have been applied to a simple trading strategy for the purposes of this article, the enhancers are useful in many other strategies as well.

As for enhancer one, I almost always wait for the price to begin moving in the direction I want before making a trade. I never assume that support/resistance zones or levels will hold; only once the price respects the level or zone do I take my trade. Wait for price to confirm your technical analysis; don’t just assume the price will do what you want, when you want.

As for the second enhancer, if you have a strong support or resistance zone–based on whatever strategy or analysis method you’re using–and the price reverses aggressively off that zone, the odds are good the reversal will continue at least for the short-term.

Trade with the aggressive traders when they respect a support/resistance level.

Understanding Pre-Market and After-Hours Stock Trading

The U.S. Stock Market is open for business for six-and-a-half hours—from 9:30 a.m to 4:00 p.m. ET—nearly every business day, and it draws crowds of thousands upon thousands of investors as soon as the opening bell rings. Wall Street is crowded during normal trading hours, but some investors are finding a less crowded space to trade in: the pre-market and after-hours stock trading sessions.

[VIDEO] Understanding Pre-Market and After-Hours Stock Trading

That’s right…you can actually trade before the market opens in the morning, and you can keep on trading once the market has closed in the afternoon. Of course, the playing field is a little different during off-market trading hours than it is when the full stock market is open, but we’ll cover that.

After-Hours Stock Trading

As its name suggests, after-hours stock trading occurs after the regular stock market hours—9:30 a.m to 4:00 p.m. ET—are over. After-hours stock trading takes place between the hours of 4:00 to 6:30 p.m. ET.

But why would you want to trade stocks in the after-hours trading session?

According to Chris Concannon, an executive VP in the Transaction Services Group at NASDAQ, “Many companies report earnings either before the market opens or after the market closes. The intrinsic value of a stock is constantly moving whether the market is open or not, and people want to access the market when the intrinsic value is changing.”

Pre-Market Stock Trading

As its name suggests, pre-market stock trading occurs before the stock market opens up for its regular hours of trading at 9:30 a.m ET. Pre-market stock trading takes place between the hours of 8:00 to 9:30 a.m. ET.

Investors like to trade in the pre-market session for the same reason they like to trade in the after-hours trading session…they want to get a leg up on the competition by reacting quickly to news announcements that occur when the regular market is closed.

Risks of Trading After Hours and Pre-Market

All investing involves risk, but the Securities and Exchange Commission (SEC) outlines the following eight risks that are specifically associated with trading in the after-hours and pre-market sessions:

Inability to see or act upon quotes:

Some firms only allow investors to view quotes from the one trading system the firm uses for after-hours trading. Check with your broker to see which firms quotes you will be able to see and off of which quotes you will be able to trade.

Lack of liquidity:

During regular trading hours, buyers and sellers of most stocks can trade readily with one another. During after-hours, there may be less trading volume for some stocks, making it more difficult to execute some of your trades.

Larger quote spreads:

Less trading activity could also mean wider spreads between the bid and ask prices. As a result, you may find it more difficult to get your order executed or to get as favorable a price as you could have during regular market hours.

Price volatility:

For stocks with limited trading activity, you may find greater price fluctuations than you would have seen during regular trading hours.

Uncertain prices:

The prices of some stocks traded during the after-hours session may not reflect the prices of those stocks during regular hours, either at the end of the regular trading session or upon the opening of regular trading the next business day. This means that even if a stock price rises in after-hours trading, it may fall right back down when regular trading opens again and the rest of the market gets to cast its vote on the price of the stock.

Bias toward limit orders:

Many electronic trading systems currently accept only limit orders in the pre-market and after-hours sessions. Limit orders may cause you to miss out on having a trade filled.

Competition with professional traders:

Many of the after-hours traders are professionals with large institutions, such as mutual funds, who may have access to more information than individual investors.

Computer delays:

As with online trading, you may encounter during after-hours delays or failures in getting your order executed, including orders to cancel or change your trades.

Conclusion: Understanding Pre-Market and After-Hours Stock Trading

If you are looking for an edge in your stock trading, placing trades in the pre-market and/or after-hours trading sessions may be a great place to start. Just remember that there are additional risks you need to be aware of.

Check with your broker to see if it offers off-hours trading and what you need to do to qualify.

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