Night Moves for Daytraders

Lower your overnight risk by examining price history to see how often a stock gaps compared to the broad market. Indeed, many charts have a gap "signature" that shows a consistent pattern in the trend direction, or vice versa. This simple analysis gives traders an important edge in their overnight holds.

Doing nothing is often the best strategy when the market moves against your overnight position. Opening volatility often frightens traders and investors out of their stocks, but the opening price often prints the worst exit of the day.

Overnight positions incur less risk when long in a strong market or short in a weak one. It also makes sense to extend the holding period in a trending market but become a rapid-fire daytrader in a sideways market. Range-bound conditions clearly demand tighter stop losses and fewer overnight holds.

And get aggressive when markets start to run. Eighty percent or more of your annual profits will come during only 20% of your trading days. This means you need to be in the market, and stay there, when prices ramp to much higher levels.

Reduce position size if you're nervous about overnight risk. You can also take partial profits just before the close, and carry a "free trade" into the next day. Then, if the market opens flat or favorably, you have the option of adding back into your position.

I'm not a fan of averaging down, but adverse openings may present an opportunity to add shares at more favorable prices, provided that the opening didn't violate the pattern that got you into the trade in the first place. You should also be following an active plan that builds the position over time and at different price levels.

Holding stocks overnight can add dramatically to your bottom line. Most profits come in the first and last hours of the day, but it's really tough to jump into the action while the horse is galloping away. So overcome the fear and hold positions through several sessions, at least.

Of course you'll get beat up from time to time, but don't let those losses stop you from holding overnight positions. Your growing equity curve over the course of weeks or months will prove the value of this important strategy.

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Alan Farley is a professional trader and author of The Master Swing Trader. Farley also runs a Web site called HardRightEdge.com, an online resource for trading education, technical analysis and short-term investment strategies. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Farley appreciates your feedback; click here to send him an email. Also, click here to sign up for Farley's premium subscription product The Daily Swing Trade brought to you exclusively by TheStreet.com.

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