Tips on Technicals - Dealing with Night Trading
Traders have been debating the merits and problems with charting low volume night sessions since it first started. Split session trading is common in such markets as Tokyo and London futures with equal morning and afternoon sessions. Many US markets are open in the evening but activity is so low that many traders want it excluded from their charts. In this chapter, we'll examine ways to capture the price information of the night session without making intraday charts unusable.
The three charts above are different representations of 10 days of trading for the September 1997 CBT US Treasury bond futures contract. The top is the widely accepted method of simply excluding night session data from the chart. A trend line is drawn from the June 20 peak with a parallel line below. As can be seen, the resulting channel is only a fair representation of the market trend.
The middle chart is the same span but night trading has been included. Note that the early part of each day has light and flat trading. Since this session is longer in terms of time but much weaker in terms of activity, a disproportionate amount of chart space is devoted to it. The channel cannot even be drawn as the price swings seem to widen.
Finally, the bottom chart includes all the data but squeezes out the "dead space" where trading did not occur. This is called a tick-volume chart where trade count, not time, is on the bottom axis. As can be seen, the declining trend line has three price touches instead of two so it is a much better indicator. The parallel channel line has several solid touches June 26 as well as the bounce on June 30. A higher confidence trade can be made at the channel break on July 1.
There is another feature of this type of chart. High volume days can be identified as they occur which is something futures traders cannot do on time-based charts. The wide chart allotment for June 19 indicates high trading activity. This is a valid volume substitute because research has shown that trade count correlates reasonably well with actual contract volume.
Because time is removed from the analysis, there can be parallels drawn to point-and-figure charting. It is suggested here that analysis of tick-volume charts follow the rules used for regular tick charts instead.
Use all the tools
Although futures exchanges say that night session trading must be included in the data, it is up to the individual to determine how to handle it. Daily highs and lows are usually set in the more active day session so position traders may not have a preference either way.
Even though tick-volume charts offer a clearer picture of all the data, removing time from the analysis removes a technical tool as well. All three methods should be used for the best perspective on the markets. A trader's narrow focus may miss changes that occur with night session activity and gaps that appear on one type of chart may not appear on the others.
