Advanced Trading Strategies: Order Carry Over vs. EOD Cancellation | StoneX

The minutes preceding the closing bell are a time of intense deliberation for traders who are managing open positions. For intraday and day traders, the decision is simple because going home net-flat is the name of the game. However, when implementing multi-session advanced trading strategies, each market closure presents a unique collection of assumed risks and potential rewards.

When the Market Is Closed, It Really Isn’t

At the crux of the decision to carry an open position through a daily or weekly close is the question of risk exposure. Day and intraday traders view being active while the market is ceased as a liability. In order to eliminate this risk, no matter the scope of their advanced trading strategies, they elect end of day (EOD) cancellation to exit each session with zero exposure.

While the futures market daily “overnight” period (about an hour depending upon product) may seem insignificant, a lot can happen during this time. A breaking news item may drive supply/demand and bid/ask spreads haywire, or a computer glitch may prompt a product to resume trade at a price very different from its previous close. These phenomenon create several challenges for the trader, most of which being “gaps” in the market.

Gaps in price are discrepancies in the market that occur unexpectedly, giving retail traders no opportunity to reduce leverage or close out open positions. It’s due to this aspect of futures trading that higher margin requirements, known as “maintenance” or “overnight” margins, are put into place going into market close. Here are a few for the most commonly traded products on the CME:

Overnight margin requirements must be taken into account when implementing advanced trading strategies. In addition, the liability involved with the daily break and weekly close must be figured into any carry over trading plan. Simply put, while the market is closed for business, risk is not.

Advanced Trading Strategies: Capitalizing on Gaps in Price

While the impact of an unexpected gap in the market may be either positive or negative, many traders view their occurrence as creating opportunity. In fact, there are many advanced trading strategies designed to capitalize upon a new gap forming or utilize an existing one.

Any trades are educational examples only. They do not include commissions and fees.

From the perspective of a swing or long-term trader, benefitting from gaps involves anticipating the behavior of a market during its close. One popular, albeit risky, way of doing this involves carrying open positions through the weekend break:

• Weekend gap: As far as gaps go, they are often found from the Friday close to the Sunday electronic open. These instances are typically brought on by breaking news items or scheduled economic events that have skewed perception of the market, thus influencing supply/demand levels. For instance, during the 2018 G20 Leaders’ Summit in Argentina (Friday 30 November to Sunday 1 December), news of OPEC production cuts and the official signing of USMCA made headlines while the markets were closed. Subsequently, gaps in pricing for WTI crude oil futures — as well as the U.S. indices — developed upon the Sunday afternoon electronic open. Traders that anticipated such events occurring carried long positions in CL and ES through Friday’s close, reaping the gains when trade resumed.

For day and intraday traders practicing End of Day (EOD) cancellation, gaps are addressed from a more technical perspective. Here are a few common methods:

• Support and resistance: Gaps in pricing are widely viewed as being areas of robust technical support and resistance. Strategies built to utilize gaps as potential market entry or stop out points for short-term trades are often employed on an intraday basis.
• Market profile: According to market profile methodology, the majority of thinly traded price ranges or full-blown gaps are eventually filled in by the trade of market participants. Day and intraday strategies are frequently implemented in anticipation of short-term price action returning to gap areas created during a market close.

Don’t Ignore the Closing Bell!

The decision to carry open positions through a market closure or practice end of day exit is a big one. It represents an assumption or denial of added risk exposure, essentially defining what type of trader you are.

For more information on what the market close means to your trading plan, schedule a conversation with a veteran futures broker at StoneX today.