DAYTRADING

Short-Term Trading Less Short
Is Overnight Trading A New Way To Daytrade?
by Thomas K. Carr, PhD

Is the pattern daytrading regulation an obstacle to your daytrading? There may be a way around it.

On September 28, 2001, the Securities and Exchange Commission (SEC) imposed pattern daytrading regulations on all trading accounts less than $25,000. These new rules prohibited undercapitalized traders from daytrading more than twice in any given five-day period. But "necessity is the mother of invention," so I set to work on finding a way to skirt the SEC rules. It was then I came up with the idea of "OverNightTrading" (ONT).

WHAT IS ONT?

It is essential to think of ONT as a form of daytrading. Daytrading is a type of short-term trading where positions are taken in liquid, volatile stocks making sizable moves on an intraday basis, and are held from several minutes to several hours, but in no case is a daytrade position held overnight. ONT is daytrading, but with that last qualification removed.

In ONT, you establish a position in a stock shortly before the close, and then after holding the position overnight (hence the name), close it the next trading day. An ONT is a trade that takes a position in a stock with a high probability of making a sizable move during any or all of three distinct periods:

So you enter your position in the afternoon trading session between 1400 and 1545 Eastern time, and close it during the next trading day, often before noon. This means that the position, although held overnight, is normally only open for two to four hours of total trading time.

Like daytrading, the expected gains from an ONT trade are minimal relative to longer-term holds. An ideal ONT gain is around +3% return on equity. Most gains are smaller than that. But this minimizing of gain is offset by very few losses and very high percentage of wins, afforded by a sound ONT methodology. Our current return on 344 closed ONTs (since October 7, 2002) averages +1.02% per trade with a 74% win rate (253 wins and 91 losses). Trading results from October 2002 to October 2005 can be seen in the sidebar on page 24.

ADVANTAGES OF ONT

ONT has the distinct psychological advantage of trading a system in an environment where three out of every four trades turn a profit and where losses are very small. The primary idea behind ONT is that certain setups have a very high probability for trading above (for longs) or below (for shorts) the closing price of the entry day.
 

...Continued in the July issue of Technical Analysis of STOCKS & COMMODITIES

Excerpted from an article originally published in the July 2006 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2006, Technical Analysis, Inc.


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