Evening Trading

This is the content of an email to a fellow trader last night:

I have been trading somewhat in the evenings for the past week. Here are a few observations that I have concerning trading during the evening in my time zone (MST).

• I only trade until about 9 pm MST. After that, many traders on the East Coast have gone to bed. Liquidity dries up and activity drops off. It can become quite unreliable and high risk after that.
• The only trading instruments that show sufficient liquidity and tight enough spreads to trade in the evening are the 10-year treasuries, the S&P 500, Corn, (sometimes) soybeans, the Euro, the Aussie Dollar, and the Yen. The Yen and Aussie have active business days during our evening hours (Asia), so there is strong currency activity and good spreads to trade them. I always check soybeans before placing a trade during the evening to make sure that the spread is no more than 2 ticks. NO MORE! Otherwise, liquidity is poor and I won’t place a trade. Tonight, soybean trading was active and the spread was only 1 tick!
• I only trade the currency FUTURES, not Forex. Futures have tighter spreads than Forex at all hours of the day. The CME miraculously maintains tight spreads for currencies at all hours. Forex brokers make their money by widening the spreads. TS and CME make their money from charging a flat fee of only about $5-6 per round trip trade. If the spread is only 1 tick, you can break even at just 1 tick!
• I watch closely both the 3 minute and tick charts. I monitor very closely both of these charts side by side. Whichever one shows less market noise and looks cleaner, that’s the one I follow.
• I pay close attention to the Klinger Volume indicator and the EMA. I use a setting of 8 periods for the EMA, NOT the default. For the Klinger Volume indicator, I do NOT use the default settings either. I use the following settings, which give a much more accurate reading of market sentiment than the defaults:
  ATRLength: 10
  Trigger: 8
  SmoothATR: 2 (any other setting causes delay, and ruins the leading aspect of this indicator)
  Smooth: 1 (same as above)
• My entries and exits are when I get a close that crosses the EMA, and then the next candle following the one that crossed must also go at least one tick higher or lower than the high/low of the candle that crossed the EMA. The Klinger must also be moving in the same direction, and if prices have reversed from the previous trend, the Klinger indicator must cross over its MA also. If it is a reinforcement of an existing trend, then I only require the Klinger to be moving in the same direction and reasonably close to its MA (mine is yellow, but I don’t know if the Klinger MA – the trigger line – is yellow by default).
• If prices quickly cross the EMA BACK in the direction away from my position for a small loss, I assume that volatility has fallen and that volatility is too low to trade further. I then look for the conditions that Cahen lists in his book (6 periods of candles closing inside the BBands, flat BBands, T1, etc.) I usually won’t take another trade until the T1 conditions are met and volatility rises again.
• If I see a lot of market noise for one instrument, I just look at the others. Treasuries are extremely liquid at all hours, but unfortunately, they are quite sedate in evening trading until the Europeans wake up and start trading.
• Trading in Europe picks up and is extremely active and profitable at about 2 am MST. I think that is 3 am your time, but I’m not sure. Just in case you can’t sleep sometime. :)

The nice thing about evening trading is that it is much more leisurely, and you can take more time to be deliberate. A trade that might take 2-5 minutes during the day might take 20-40 in the evening.

Stay informed of your margin requirements regularly on the RJ Obrien website. Lately, margins have been updated 2-3 times each week. 6 months ago, they would only change about once every six weeks. Never max out your margin account. During these days of credit crises, it is better to maintain some extra liquidity rather than run the risk of a margin call or have your broker liquidate your positions against your will. I am expecting Congress and/or the Fed to step in and impose all sorts of new regulations and possible demands that may put small speculators like us out of business. The complaints about speculators in the business are getting louder and louder in Congress’ ears. (see my James Madison quote below).

"I believe there are more instances of the abridgement of freedom of the
people by gradual and silent encroachments by those in power than by
violent and sudden usurpations. ... The means of defense against foreign
danger historically have become the instruments of tyranny at home."
James Madison