Overnight Gap Trades - Risk Management

[garethb]

I would be interested in input on how people manage risk and reward on overnight Gap trades, particularly how they size the position. This is not an area I have really tried and have not done much analysis on it.

Grey1 has mentioned in the past taking positions overnight, I think based on OS/OB conditions into the close. I can see that you can analyse a stock to establish a positive expectancy in certain conditions of MACCI or whatever, but how do people then size the position?

I think there are two broad requirements

a) Balancing positions taken on different days and different stocks so that all trades have a roughly equal risk and reward (in similar fashion to the way we position size intra day using our chosen ATR or whatever). This presumably comes out fairly automatically from any statistical analysis of positive expectancy.

b) Assess the worst case or "worst likely case" senario to avoid a serious loss. Surely any historical analysis of today's current list of core stocks for "fat tails" still carries survivorship bias at least.

 

[pssonice]

overnight pos. on what stocks or futs ?

u cant hold on your futs overnight because the typical standard deviation of futures is far higher than 1%

 

[garethb]

I was thinking of stocks but I don't really see the reason you can't hold futures overnight (clearly people do!). Assuming you have a reasonable account size it's just down to position sizing isn't it? In fact if you have an overnight electronic market you can leave a stop in place reducing the Gap risk.

Gareth

 

[andycan]

Garethb
of course you can hold overnight positions on futures i do it all the time, i really have no idea what pssonice is talking about
the beauty on most futures products (I trade US) is they have day and night session so in reality your risk most of the time is under control
i rarely trade stocks so i could not say but from my perspective when i enter a position which requires me to hold overnight i would consider it a swing trade and with a swing trade because im aiming for a bigger share of the pie i have to allow a little leeway with my stop, but within those parameters i would not compromise my expected win to loss ratio which i work as a bare bones minimum of 1:2.5/3 anything less and i dont take the trade or i scalp during the day session
hope that helps!!

 

[garethb]

Andycan

Thanks for your reply

Whilst swing trades in stocks do carry gap risks they are normally planned on the basis of larger scale price action features of longer term charts, perhaps 60 minute or Daily, and as you say carry larger rewards and risks with appropriately reduced trade size. It is common to assess targets and stops based on chart features like areas of support and resistance.

The sort of trading I'm refering to is where a position is taken late in the day possibly in the closing minutes specifically to try to benefit from a possible gap. The plan being to close the trade in the opening few minutes (or perhaps in the pre-market) win or lose. I don't think you can quite determine reward/risk in the same way but I'm interested to know what others do.

Regards,

Gareth

 

[andycan]

The sort of trading I'm refering to is where a position is taken late in the day possibly in the closing minutes specifically to try to benefit from a possible gap. The plan being to close the trade in the opening few minutes (or perhaps in the pre-market) win or lose. I don't think you can quite determine reward/risk in the same way but I'm interested to know what others do.


To determine if a stock will gap up or not its a different ball game I dont think anyone can determine (unless you are a New York specialist) if a gap is going to occur im sure there are instances that a stock may show a habitual manner how it comes of the blocks, but before I can say for certain it maybe helpful to know which stocks you are talking about for example stocks that are traded at Wall Street will initially act differently to NASDAQ stocks.
Wall Street is open outcry whilst NASDAQ is electronic
there is usually one specialist per stock for New York markets and one of his functions is to set the price at the open, and guess what happens if he has a large order to buy pre market??
NASDAQ can have ten or twenty market makers per stock and they openly compete for business so as you can see there is a fundamental difference at the point you are interested in.