How Overnight Edges Came To Be

The above video covers everything in writing below.  You may either read or watch!

Many people who come across this page may already be familiar with me from Quantifiable Edges, a site I founded in 2008 and still run today. But my story, and the story of how Overnight Edges came to be, is quite involved and I will share it here.

I first began trading stocks in the mid-90s. I started off using an IBD-style approach and focusing on the intermediate-term time frame. In the late 90s I also became interested in day trading and delved into that a little bit. In 2001, after several years studying and trading part-time, I decided to make trading my full-time job. While sometimes exciting, trading can also be a lonely endeavor. After spending a year in my trading cave I decided I would be well served if I began sharing some of my ideas. I spoke with Larry Connors at TradingMarkets.com and he agreed to let me do a column on their site. So in addition to my normal trading activity I began writing twice a week and having it published on Trading Markets. I did that from 2003-2007. During this time, my trading was evolving. 2004 was a difficult year for me in the markets and I made very little money. In an effort to plug the holes in my trading approach I began studying the markets from a new angle. I took a quantitative approach. It’s an approach I quickly became much more comfortable with, an approach that eventually led me to begin Quantifiable Edges. One project I did at the end of 2004 was to break out U.S. market returns to see what was achieved during the day versus what was achieved overnight. This led to a revelation.

Looking at the market in this way showed me that on a net basis more than 100% of the gains over the last 10 years (1994-2004) had been due to overnight gaps. Even in bull markets the money made during the day was minimal. I decided I needed to find out if there is a way to anticipate the likely overnight direction of the market. So I began testing on everything and anything I could think of. And I found an awful lot of ideas that worked. I then took those that tested the best, and built a system that would generate signals based on some of those concepts.

I began trading the system in January of 2005. In the first quarter of 2005 I began writing a book on the overnight edges I had identified and been trading. After finishing 4-5 chapters I decided book was a bad idea. My overnight trades were doing too well to share everything I knew with the world for virtually zero compensation.  (Anyone who has published an investment book can confirm the zero compensation.) I thought there must be a better way to make use of my research.

In 2006 I got involved with some people who were starting a hedge fund. The fund was primarily going to trade with a short bias, but they were looking for a few strategies that could make money on the long side as well. They hired me to implement a few of my strategies. One was the Catapult strategy that I’ve written a lot about at the Quantifiable Edges blog, and the trades of which I publish in the Quantifiable Edges Subscriber Letter. The other strategy they decided to use was my overnight strategy. The fund made money in its first year, and the biggest alpha contributor was the overnight strategy. Unfortunately the hedge fund was unable to raise a critical amount of capital. (Trying to sell the idea of a short biased fund in 2007 was not easy. The principles were one year too early.) So in December of 2007, just after the market had topped, and before anyone realized how bad it was about to get, the fund was closed.

The closing of that fund came as I was preparing to start the Quantifiable Edges blog and Subscriber Letter. (It did not evolve into a full-blown website until the second half of 2008.) Quantifiable Edges, while primarily focused on the swing time frame, has covered and discussed everything from day trading to very long-term trading… everything except overnight edges.

During this time, many other people published research in articles, white papers, blog posts and more, all noting the substantial edges that exist in the overnight market. Yet while they all seem to note some of these edges none of them ever suggested trading them. And none of them ever looked terribly deeply at how to do it. I continued to refine my research.

My original system for trading the overnight was decent – and it provided solid returns for several years – but it had 2 big flaws.  First, it was entirely price-based.  It wasn’t until later that I incorporated methods to utilize both seasonality and measures of market internals.  Second, the original system was not adaptive.  It used data from 1994 – 2004 and I did not initially incorporate a method to roll the data forward and adapt to evolving market conditions.  But it continued to work and after starting Quantifiable Edges in 2008 I was so busy with QE-related research that the overnight edges work simply stayed on the backburner…until 2010.

During 2008 and 2009 while I was getting Quantifiable Edges ramped up I knew that I wanted to keep the overnight edges separate.   Quantifiable Edges was more swing-trade oriented and the overnight edge work was so potent that I decided it deserved a place of its own.  In 2010, soon after completing two of my biggest Quantifiable Edges projects: the Quantifinder and the Quantifiable Edges Big Time Swing System, I began taking a fresh look at my overnight edge work.  I decided I needed to fix the 2 flaws I mentioned above.  So I did a massive amount of research into utilizing internals and seasonality.  And I also made the research completely adaptive.

The end result was the Overnight Edges Odds Sheets, which were basically finished in late 2010.  The format of the Odds Sheets was inspired and encouraged by my friend Scott Andrews, of MasterTheGap.com.  The Odds Sheets are essentially 3 different “systems” that utilize criteria independent of each other: Price Action, Internals, and Seasonality.  They were designed to exploit the edges I uncovered over the years in each of those 3 key areas.

But while they were basically ready by 2011, I was not.  I still didn’t feel as though I could release them to the world. Although they provided valuable information with regards to overnight odds, I had a lot of apprehensions about the best way to utilize them.  So I developed tools that would allow me (and soon subscribers) to essentially backtest the Odds Sheets.  Doing this answered a lot of questions.  Should I require all 3 sets of Odds to strongly agree?  Should I average them together or use a weighted average?  What if I preferred not to trade over weekends or holidays when overnight futures market are closed – how would that impact results?  These questions and more are easily testable now using the Overnight Edges Monster.

Further, the most popular feature on the Quantifiable Edges website is the Quantifinder.  The Quantifinder essentially identifies setups that I have discussed in the past in the Quantifiable Edges Subscriber Letter and posts them each afternoon and evening to the website.  I decided to take a similar approach with Overnight Edges.  But Overnight Edges is new, so instead of pointing to past publications I simply designed the Overnight EdgeFinder to identify high-probability setups and publish in written English the past performance associated with them.  It’s another terrific tool that allows for decision making beyond simply reading off a nightly Odds Sheet.

The development of the Monster and the Edge Finder took much of 2011 and part of 2012 – all of which allowed me more time to confirm the usefulness of the Odds Sheets.  And the last few months have been spent building the website.  So I hope you like it, and I hope you find the ideas inspirational, the research valuable, and the approaches I use translatable into profits.  I’m writing this a few weeks before the site is anticipated to go live, and I’m sure we’ll continue to see more evolution in both tools and knowledge base.  At this point I am just very excited to finally be able to share years of work and research in a format that hopefully many traders will find valuable.

Hopefully you can find answers to many of your questions in the FAQ area and throughout the website.  If not, feel free to use the contact form to reach out to me.

Best,

Rob Hanna