Thursday provided some interesting overnight evidence and it also led me to take a trade. Let’s first look at the Odds Sheet and then I’ll discuss how things played out.
As you can see, SPY, ES, & NQ all saw their Averages appear highlighted in green. ES is what I primarily trade in the overnight, so that is where I focus the most. Numbers there were solid across the board, with Price Action, Internals, & Seasonality all pointing higher to some degree. Additionally, the EdgeFinder identified 3 studies that all suggested an upside edge. So I decided I would enter long at the 4:15 futures close if ES closed at 1998.50 or lower. It met those qualifications and I got long at 1997.75.
My initial plan was to use the standard stop, but place my target somewhere between then Standard Target and the X Target. The employment report always adds an element of risk, so I intended to take profits ahead of the report if my position was profitable. If not, then I would simply keep the stop in place and manage it as usual.
Unfortunately, the trade never made it that far. A selloff in the early morning saw me get stopped out of my position at 1989.75 well before the employment report was even released. Then, upon release the market jumped up. ES briefly made it back to positive territory before opening with a gap down of 2 points. Anyone that took the ES trade and used the standard stop as I did got the worst of it. ETF traders would have made out much better. SPY only gapped down $0.04, and QQQ gapped up $0.19. NQ traders would have made out well, regardless of whether they used the standard stop or not. NQ’s stop point was never reached and it rebounded nicely and opened up 5 points this morning. So your experience last night would have depended largely on your security of choice as well as whether you used the standard ES stop. Unfortunately for me, I got the worst of it. But I am thankful that some others in the room were able to book profits.
It has been a frustrating couple of months for me. Last night’s stop out was the 4th time the stop has been hit in the last 2 months. Typically, there are 2-3 per YEAR. And none of the stops helped the cause. They all saw a partial or total rebound. I recently did some research for subscribers with regards to stops. We discussed it in the trading room and I wrote up a paper on it. I intend to edit it in the next few days and update my comments. At this point I am strongly considering adjusting my stop tactic.
Last night’s loss also has the Overnight Edges Tracking Account mired in its worst drawdown (nearly 8%). While drawdowns are incredibly frustrating (especially when they are due to multiple barely hit stops), they are part of trading. The nice thing about my overnight strategies is that they are not, and have never been, well correlated with my other strategies. The overnight drawdown is not coming at a particularly difficult time. And if my other strategies start to suffer a little, perhaps my overnight stuff can help me at that time. In any case, I have done this long enough that I am not overly discouraged. I’m confident months and years down the road the current overnight drawdown will look like a hiccup in my profit curve.
It is also encouraging that while my stop management has let me down lately, the core Odds and studies have played out well for multiple indices. If I was using SPY or NQ as the proxy in the overnight tracking account, it would be at or near a new high, rather than in a drawdown.
Good luck if you trade tonight, and rest easy!
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