Wednesday, October 17, 2007

My eMini Setups, Part II - The Time of Day

Even though I am not able to use this for the next little while, I will finish off this post that I had started last week.

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Like all human beings, traders are creatures of habit. Because of this, there is a tendency for certain actions to occur at about the same time period in each trading session.

I like to call this the "Time Of Day" Pattern. This is not something I created nor invented. Also, a discussion about the validity of this pattern is beyond the scope of this article. It is simply something that I read about and observed it occurring often enough that I do use it in my trading. I can't even point you to any scientific study that investigates how often this pattern occurs. But even with a 40% occurrence rate, this makes it significant enough to be trade-able, in my opinion, simply because it is very easy to look for.

The two key time of day patterns that I have used are the 7am reversal and Last hour reversal time periods. There is also a mini-reversal time period in the last half hour of trading, but that does not occur as consistently as the other two.
One of the reasons why the 7am (PST - that's 10am for those of you on New York time) reversal time period works better than a random time period (like 1037am) is because this is one of the three time slots when economic reports are released to the public. The other two times are 530am and 11am. 530am is pre-market, so it is hard for me to trade during that period. In the 11am time period, I do usually notice an increase in volume, but reversals are not as consistent.

Here is a good example of a 7am reversal and the last hour reversal in the S&P500 eMini futures that occurred on Aug 30/07:

The 7am reversal does not always occur specifically at 7am, but rather more of a time period. I usually look for reversals anywhere from 7am to 710am. Beyond that, the pattern gives way to random noise and the typical neurotic behaviour of the eMini.

Here is one textbook 7am reversal for Cable which occurred on Oct 4/07:

The setup is as follows:
- between 645 and 7am, check the index to see whether there is an easily identifiable trend in place. After all, it can only reverse if there is a pre-existing trend in place. And believe me, this step is important, because I have been caught on more than one occasion trying to look for a 7am reversal when the market was flat and trendless to begin with!
- draw a manual trendline to clearly identify the trend, and also to identify the point where the trend will be broken.
- at 7am, start watching the index in question. If it crosses the manual trendline, then enter a trade. If you get good enough at watching the tape and/or the chart, you will be able to tell whether it will cross the manual trendline before it even happens, in which case, enter before the trendline break to minimize risk.
- stops are a bit more of an art form. The 7am reversal either works right away, or it doesn't. I have alternated between using a fixed point stop (eg. 1 or 1.5 points), or the low of the previous candle.

Here is a 7am reversal that occurred on Sept 11/07:

To improve upon the probability of success of this setup, I also usually look for other additional technical indicators and signals to get me into the trade during that time.

I have traded this setup successfully several times, and have documented at least one of those times.


eTrader said...

Hi Phileo,
Outstanding post on the 7am reversal set-up.
I have been using this set-up for many years (when I was daytrading) and found it to be quite effective.
However, I usually would wait until 10:20 am EST (7:20am your time) to comfirm the reversal, sometimes you get alot of noise on the initial breakout and a brief correction before the reversal is confirmed at 10:20, then the move will hopefully materialize.

Phileo said...

Hi eTrader,

Thanks for your comments. I haven't kept any stats myself, so I am curious, how often do you see this 7am reversal occurring ?

eTrader said...

Hi Phileo,
Likewise, I haven't kept any stats, and haven't been daytrading, but it seems not as often as when I used it 2-4 days a week back in '95-'99, of course everything is much different now.