A Method for Trading the Indices in Pre-Market Hours

The market continually changes and a trader must keep his options open. Most traders only look at the day market between the times of 08:30 and 15:15 CT. However, while the traders in the U.S. sleep, the market continues to trade throughout the world. Depending on where the sun is shining, determines who has control of the market.

Following the market throughout the world can give a trader the insight on what will happen during the U.S. day market. Though getting up early is sometimes hard, it can pay big dividends to those who choose to be the early bird.

The biggest problem with trading in the night market is the lack of "indicators" to help guide the trader. The S&P 500 futures open at 15:30 CT and close at 15:15 CT. Knowing this, the S&P futures trade virtually 24 hours a day. Taking advantage of the night market can help in determining how the day market will perform. But figuring out what moves the market can be baffling. The key to understanding the night market is who is controlling it. The first market to open is the Nikkei (Japan), followed by the Hang Seng (Hong Kong). These are the two primary Asian markets. How they trade will determine where the S&P will go. Asia has its own economy and its own news, and depending on how the news filters in, depends on where the market goes. The S&P futures will follow this trend while Asia is open.

A word of caution: the Globex market (the night market) moves very slowly. Unlike the day market in the S&P futures, which has an average range of 32 points, the night market will move only about 10 points in a 17 hour time period. Compared to the day market that is open only 6 hours and 45 minutes, it can be seen the patience really can be a virtue. Do not be eager to be paid quickly. Though the night market can move like the day market during big news, it generally will be like watching paint dry if you watch it tick by tick.

The best strategy is to get in the market, place a protective stop, and go find something else to do, only checking in on your trade every now and then. As Europe opens around 01:00 CT, more evidence of market direction can be seen. Germany has the largest economy in Europe and its DAX futures reigns king during the European trading. Because of this transition, the S&P futures begin to follow the direction of the DAX futures. Like the U.S. market, it is best to give the DAX the first 30 minutes from its open to trade to allow it to find a direction. In doing this, the S&P futures have time to re-adjust from the Asian to the European markets.

Here is a scenario to consider: Chart 1 shows the DAX futures during opening of the DAX cash market, along with the S&P futures during the same time period. On this day, the DAX futures open and begin heading higher. As the DAX took out its highs, the S&P carried along with it. But looking at these two charts does not tell the whole story. Remember that this is a global marketplace, and we must see how the rest of the world up to this time has traded up to this time.

On this day Asia was higher during their session, and Europe opened higher based off Asia’s close. Knowing this, the DAX could correct the trend of Asia, or accelerate it. If the S&P would have taken out the overnight lows, the down trend would have been confirmed in the market. However, as in the case in Chart 1, the S&P held its support area, giving caution to the short side as the market consolidated before heading higher.

One of the best trades in the DAX futures markets is made off of the opening 30 minute bar of the cash market. Though we must look at the global markets for confirmation, trading off of this range will normally pay 5 to 10 DAX points. Chart 2 shows this opening range with the DAX in sync with the global markets. The DAX is worth 25 pounds per points and trades in 0.5 point increments. On this day, its opening range is from 6585.00 to 6545.00 (high and low of the blue bar). Buying the DAX futures 6 points above the bar (or selling it 6 points below the bar if the market went lower) would take you long at 6591.00. If looking for 10 points on the trade, a sell limit at 6601.00 got filled shortly after entry. A profit of 10 DAX points is worth 250.00 pounds, or $380.00 per contract.

As can be seen in Chart 2, the trend continued higher and would have paid 50 to 60 points in the DAX with a trailing stop. However, this is not typical, and it is best to look for 5 to 10 points. Another way of trading it is to finance your trade by trading multiple contracts. For example, if you would have bought 3 contracts at 6591.00, sold 1 at 6595.00, and 1 at 6601.00, then adjust your protective stop to 6589.00 (2 points below entry), you could lock in 12 points of profit (if stopped out) and see if the market could continue in your favor. If the market continues in your favor, maybe use a 10 point trailing stop and see how far it goes, otherwise, take the quick profits and be done with it.

The night market moves at a slow-pace and is certainly quite different from the volatility that occur during the day session. As the sun moves around the world, more volume and movement pours into the market making it easier to get in and get out with a profit. Always take note if the foreign markets are trading in one direction, the odds of making a good trade greatly increase as the DAX futures open. Follow the S&P and DAX trend, they will keep you on the right side of the market.

Tom Busby has been a professional securities trader since the late 1970s and is the author of "Winning the Day Trading Game" and "The Markets Never Sleep." He is the founder of DTI which teaches traders how to operate in the global futures and equities markets. For more information go to www.dtitrader.com.