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The following file shows the difference between SPY overnight and intraday performance from 1993 to present:


It is clearly evident from the two equity curves (without compounding profits) how nightly performance is, on average, superior to intraday market performance. This is the primary edge on which the entire Nightly Patterns’ trading style is based.

When I first approached trading futures, I was intrigued by high leverage and intraday trading. My thoughts were all about avoiding overnight risks and having all my money in cash at the end of the day. I experimented with through many different systems, but the more I studied and traded, the more time I spent in front of the screen. I ended up with too many hours following indicators and charts waiting for the next trade or taking care of the current one. Time. Eventually, I realized that what I needed was a much more time-based approach: knowing in advance at what time to start and exit my trades. This can allow the trader to better shedule the day with no more than one hour on average spent on active trading and all the background hard “numbers” work to code the patterns. Trading for a living can be  easily managed without endind up living for trading.

My research led me to a number of timing strategies, from gap fading, to open range breakouts, to bar patterns daily trading, etc. I was an avid follower of Michael Harris’s work on patterns and Rob Hanna’s QE; so, when Hanna started seasonals overnight trading in his blog, I realized there was much more work to be done with nightly patterns, resulting in the birth of Nightly Patterns in the late summer of 2012.

The Nightly Patterns blog is built around two main concepts: bar patterns trading and overnight trading on the CME market futures. Economists tend to treat the S&P 500 as a proxy for the entire market, so I focused on SPY etf data for backtesting. I trade with ES futures because of its leverage and also because it is the most liquid instrument in the entire world market.

First, here is how I use bar patterns, to define a pattern I consider four main daily prices: open (O), high (H), low (L) and close (C). I then look at daily volume and add recent past multiday price action.  Looking at the recent bars (days), I manage to find interesting configurations.  Then I “backtest,” looking to see how past configurations resolved themselves.

Second, I looked to see if nightly market behaviour has been increasing in volatility and average excursion during the previous ten years. Dividing intraday session from nightly ones results in increased market predictability. Only nightly trading can reduce trade adverse excursion, because, as opposed to intraday sessions, when the night starts trading on the long side, it is highly probable that an up gap open will occur the following day. Vice versa for shorts.

One core principle of my trading philosophy is that every day I keep building new patterns and code them in my patterns finder algo thereby allowing my trading to adapt to different market environments and market changing dynamics.

Old patterns will be then constantly monitored each time they trigger again, and when their equity curves begin to struggle, I just classify them in a “stand by” category in the patterns finder algo, thus avoiding thus to use “really old” patterns.

Last, the same money used for overnight trading can be used with intraday strategies to enhance both styles’ returns. Following this more comprehensive approach, Shannon’s Demon Effect will result from our trading system diversification.

These are some good articles concerning the “overnight trading” topic:

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