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I was curious as to how much weight the majority of traders place on overnight inventory? How does it affect your daily trading plan? And what components of market structure and volume do you use to judge overnight inventory as being either net short or long?
From your question it sounds like you have been listening to Jim Dalton's Market Profile webinars or reading his course material.
Just do what he does and take a look and use your intuition:
If the majority of the overnight volume is above the Settlement then inventory is long and vice versa.
If the volume is balance around the Settlement the inventory is neutral.
Exceptions would be if volume was above the Settlement but in the period before the former pit open there was a news announcement and price rapidly dropped down to the bottom of the overnight range then the most recent and relevant volume traded would be net short.
I think with a quick look before the open it should be either clearly long or short, and if you are unsure then it is neutral.
I like to note where the overnight volume POC was if it is very prominent, and where the overnight high and low are but that's it. I tend to think once the first hour of the RTH session is done and you have and IB high and low to watch and an hour of actively traded volume has gone through then the overnight levels have decreased a great deal in relevance.
You do not win as a trader, you just get to play again the next day. If that game doesn’t appeal to you then you should not trade. Gary Norden
Ok thanks for the reply. Today is a great example, overnight inventory is clearly net short for all indexes(except for telecom, but who really follows telecom) and upon the opening there was a brief short covering period. Your reply was extremely thorough and answered all aspects of my question except for one. How does overnight inventory affect your daily trading plan. Like today for example, did the swift overnight sell off turn your bias to look to sell strength or identify a prior market reference level to buy this weakness.
That's less of an inventory question and more a context question. Dalton always goes on about context
"However, it is important to state explicitly before we proceed, that all trades, and observations, must be made in context." - Dalton, first paragraph of the signature trades worksheet.
This is all with the benefit of hindsight. But looking at the CME website daily ETH chart screenshot of chart showing overnight session down just before RTH open, the overnight inventory is short but we are right at a weak low of the past two or three days with lows all bouncing off $65. There will be lots of stops below. (According to Dalton and others large firms/traders tend not to use overnight stops so the fact the overnight session went below the weak low is irrelevant).
Price opened then sat at the yesterday low just above the weak low for fifteen minutes and couldn't bounce up and away. The open churned between 65.03 and 64.90 with the weak low below 64.90. A break of that low should enact stops so you have a good risk reward. A fifteen tick stop say to make more potentially. Overnight low was at 64.67 so price should be able to get there especially as on the vast majority of days the overnight range will be taken out.
So premarket trading plan notes:
1. Market will open at Y Low.
2. Small excess high from Thursday. Price tried to go higher yesterday and failed.
3. Weak low of the past few days right below us with room to run below.
After the open:
First fifteen minutes price ranges in a 15 tick range and tries to go up a few times but can't hold above $65.
So directional bias is down as price can't go up and a break out of range trade for example would provide a good potential risk and reward.
Just my thoughts, and I am in no way an expert in this. And like I say, good in retrospect but before I sound too smug, I planned poorly yesterday and this wasn't a trade I took.
You do not win as a trader, you just get to play again the next day. If that game doesn’t appeal to you then you should not trade. Gary Norden
Great analysis and blueprint of what you take into consideration when formulating a trading plan for the day. Do you ever include levels from the overnight session into your trading plan. Like for instance the value area high, POC, single print areas between a double distribution etc etc. I always try to keep past weak highs and lows written down on my daily plan, but have been finding the value area high/low, edges of double distributions and POC’s from the overnight to work well as reference points lately. Pulling the trigger on these reference levels when an apparent auction failure is taking place is a whole different story. I primarily trade NQ by the way. I do follow oil, but get my head handed to me every time I trade it.
