A Lucrative Trading Strategy Learned From Two Dickhead Traders…
Subscribe to receive weekly updates!
It’s Covid and the market is insane. I realize that much of the money being made is from overnight momentum, but how the f*ck does one capture it?
Why does it seem like the stocks that are up the most at the end of the day are the ones that continue to trade higher?
Well, that’s because it is the case… at least in certain environments.
Anyways, I kept hearing about these two dickhead Miami boys along with the guys on their team (who are actually amazing people) about how they were making “sick coin” on overnights.
One thing I noticed is that short term market conditions actually mattered… Okay, I didn’t realize this at first, but after some time of trading the strategy, I did.
Can we determine when we should be long, short, or hands off overnight?
At first, the answer was no…. sadly
But, as time passed, I came to realize it wasn't overly challenging. I examined my profit and loss curve for this strategy, overlaying several short-term moving averages on the indices (IWM, and $SPY), and compared them to the peaks and troughs of this overnight system.
Shortly afterward, I discovered that the distance from the 9-day moving average appeared to be ideally suited for this strategy, indicating whether I should seek overnight longs, overnight shorts, or simply stay hands-off. To confirm this, I pulled data on the strategy spanning the past five years, incorporating the new market indicator, and reached the same conclusion.
Okay, this is what it looks like.
If 2 out of 3 indices (or all 3) are 1% or more above the 9-day moving average, we are "Trending Up", indicating a momentum-rich environment for overnight longs.
If 2 out of 3 indices are 1% or more below the 9-day moving average, we are in a "Trending Down" environment and should consider looking for overnight shorts.
If 2 out of 3 indices are within 1% of the 9 day moving average, we must avoid overnights like the plague, and in fact, most trading! Ranges are contracting, we are getting a lot of false moves and it’s rather difficult to make money during these periods.
(All are in reference to the 9 day MA on the daily)
Okay, now that we understand market momentum, when to look for longs, when to look for shorts and when not to trade, let’s get into the actual strategy.
In essence, it’s simple… if you can tackle the hardest part of following it!
For overnight longs, you want to see stocks closing on elevated rvol in the top 80% of their intraday range. For shorts, you want to see stocks closing in the bottom 20% of their intraday range.
There are 3 permutations that we will get into.
But for now, let's discuss the three scanners that I review in the last 30 minutes of the trading day.
For overnight longs on mid/large caps (trending up tape), the criteria below must be met.
As you can see, $HOOD populated on my scan into the close (1 pm = 4pm) on May 17th 2024.
Because it set up into the close without any upcoming news that I am concerned with (earnings, economic data, offering risk, similar names reporting in the sector), I simply buy the stock the last 5 minutes of the trading session, risk against the close of vwap or a level just below (some nuance is required based off symbol specifics) and hold until the following close.
Close to close!
Okay, now the fun part of this strategy… turds!
For overnight small caps, here’s the criteria.
As you can see, both AMC and GME didn't actually trigger this filter at the close because they were below the top 80% of their range. However, they did trigger it in after-hours trading and by 8 pm (4:55=7:55 pm).
Since we are buying in after hours, unlike the first example with $HOOD, which was set up into the close, the strategy involves either selling into the momentum push in after-hours or adding/taking a position just before the 8 pm close and aiming for the gap. Often, if they set up that way, it’s best to do both: take the momentum trade in after hours, sell some or all into the push, and if we close strong at 8 pm without going parabolic, add for the gap.
It's crucial to understand that this permutation of buying the strong 8 pm close for the gap, produces some of the biggest winners. However, it often signals the "top" of the move if we do in fact get the “large” gap in the early morning session.
Okay, now that we covered the long side, let’s discuss the short side when at least 2 out of 3 indices are “Trending Down”.
For me, I'm much more selective with short positions. Typically, I target mid to large caps and stay clear of turds closing weak for obvious reasons. While there might be potential, I prioritize maintaining my sanity... and my hair. At 28, I'm already turning to $HIMS to preserve what's left!
Much like the first example with $HOOD, the same applies for the short side. Micron setup into the close so the goal is to hold until the following days close.
Alright, so let’s review the 3 different permutations that were discussed.
I’m explaining them from the long side for simplicity purposes.
- Setting up at 4pm and simply buying the close. “Close to close.”
- The momentum trade shortly after the bell if we curl on up. Often looking for this to play out in after hours and hit the road by 8 pm if it happens to go parabolic.
- The strong 8pm close. Taking these off on the gap up in premarket.
Alright, it became a bit lengthy, but I've tried to condense all of it!
Subscribe to receive weekly updates!
If you made it this far, please hit that little toast button so I know you finished it!