Module 5 · Lesson 16 of 17 · Order flow and auction market theory · About 5 minutes
Overnight Inventory and the Overnight High and Low
On this page
- What you will learn
- What is the overnight session?
- What is overnight inventory?
- Overnight inventory diagram
- What is an inventory correction?
- How is the open described against the overnight range?
- What this does not tell you about overnight inventory
- Method in Practice
- Check yourself
- Reflect on your own process
- Sources
Before you read: Reference Levels from Prior Sessions: High, Low, Close and Value
What you will learn
- What the overnight session and the overnight high and low are in futures markets that trade nearly around the clock.
- What overnight inventory describes, and how an inventory correction is defined.
- How the open is described relative to the overnight range and the prior value area.
What is the overnight session?
If a futures contract trades almost 23 hours a day, what part of that day do most charts call “regular”?
Many equity index futures trade nearly around the clock on weekdays, with a short daily break. Readers who focus on the US cash market often split the day in two: the regular trading hours that match the stock market’s session, and everything else, called the overnight or electronic trading hours. The overnight high and low are the top and bottom of the range traded between one regular-hours close and the next regular-hours open.
What is overnight inventory?
If most overnight trade happened above yesterday’s settlement, who is holding positions from higher prices?
In this lesson, overnight inventory is a profile-reader’s descriptive proxy, NOT a measured census of actual outstanding positions. Choose and label the overnight window, reference and weighting before interpreting it. A prior official settlement and a prior regular-session last trade are different possible references; do not substitute one unlabeled. Every executed trade has a buyer and seller, and price location alone reveals neither opening/closing status nor who still holds exposure at the open.
Completed fictional comparison: fixed prior-settlement reference 100.00; include only the declared overnight record, with no observations exactly on 100.00. Above reference there are 8 TPO row-block letters and 200 contracts; below there are 2 letters and 800 contracts. A TPO share-above measure is 8/(8+2)=80%; a volume-share-above measure is 200/(200+800)=20%. If this worksheet labels above 50% “above-reference weighted,” below 50% “below-reference weighted,” and exactly 50% “even by this measure,” the first proxy is above-weighted while the second is below-weighted. These are stipulated classification conventions, not industry-universal thresholds or contradictory position measurements. A TPO letter means a row was visited during a block, not exact dwell time; contracts measure quantity. No participant net ownership is computed.
Overnight inventory diagram
above-reference/below-reference by the declared proxy; NOT measured net positions.
Reference: prior settlement; not prior regular close.
8 above/2 below letters versus 200 above/800 below contracts
Illustrative diagram constructed for teaching. Not real market data.
Reference-based location and declared weighting describe the selected overnight record. They do not identify actual holders, compel a correction or predict the regular session.
What is an inventory correction?
If many overnight participants bought, what might some of them do once the regular session opens?
An “inventory correction” describes a move back toward the chosen reference after a window was classified to one side by a declared proxy. It does not establish that previously trapped traders liquidated; that is a separate causal hypothesis. With the fictional reference 100.00, an open 101.00 followed by 100.25 moves 0.75 point toward the reference. An alternative path 101.00→102.00 moves 1.00 point away. Both are possible; the prior proxy alone selects neither path or actual position change.
How is the open described against the overnight range?
Did the market open inside yesterday’s value, outside it, or outside the whole overnight range?
Readers often describe the open with two reference sets. The first is the prior value area and range, as covered in opening types. The second is the overnight range. An open inside both describes balance. An open near or outside the overnight high or low describes a market already testing the edge of the night’s auction. These descriptions organize what is seen at the open. They do not set a direction for the day.
What this does not tell you about overnight inventory
- Which measure of inventory is right. TPOs, volume and VWAP can disagree.
- Whether a correction will happen. Sometimes the regular session continues the overnight direction and sometimes it reverses; this lesson does not measure how often.
- Who held the overnight positions or how long they planned to hold them.
- Nothing here suggests buying, selling or holding at the open or at any overnight level.
Method in Practice: when the inventory label is a condition
Fictional example. John, Harbor Index futures, the prices, times, costs and results are all invented for teaching. This shows how a written plan can be built and tested. It is not a recommendation, and nothing here says how often this idea works.
Try it on a real chart. Test this idea yourself on past sessions with bar replay. Keep your own count, including the days with no trade.
The idea. The lesson calls overnight inventory a proxy, not a count of real positions, and says letters and volume can disagree. John only uses the label when both measures agree. Even then, he needs the first period of the regular session to break lower before he sells, because a label doesn't make a correction happen.
John's plan
- Setup
- prior settlement 100.00. Overnight window 17:00–08:30 CT. At least 80% of overnight TPO letters and at least 80% of overnight volume above 100.00. Open above 100.50
- Enter if
- price trades below the first 30-minute period's low after that period ends (sell stop one tick below it). Sell.
- Wrong if
- price trades one tick above the first period's high (stop order)
- Manage
- buy back half at 100.40, the rest at 100.10 (just above the settlement) or by 11:30
- Risk
- $150 maximum, costs included
Three outcomes
-
Worked: price moved back toward settlement → +$60
-
Failed: the session continued the overnight direction → −$120, inside the limit
-
No trade: letters were 80% above, but volume was mostly below, so the plan wasn't active → $0
Show the full replays
| Item | Plan |
|---|---|
| Context | Prior settlement 100.00. Overnight 17:00–08:30 CT. Both letters and volume at least 80% above 100.00. Open above 100.50 |
| Entry condition | After the 08:30–09:00 period, a sell stop one tick below its low. Sell 2 |
| Wrong if | A stop order one tick above the 08:30–09:00 period's high |
| Management | Take profit on half at 100.40 (limit) and move the stop for the rest to the entry price. Rest at 100.10 (limit). Time limit 11:30 CT |
| Risk cap and size | $150. Here the stops are 0.45 apart; with a tick of slippage on each, about $60 per contract, so 2 contracts |
| Not active if | Letters and volume disagree, or either is under 80%. Also no trade with a scheduled major release within the hour |
Replay A: worked
| Time (CT) | What happened | John |
|---|---|---|
| Pre-open | Letters 8 of 10 above 100.00, volume 84% above. Opens 100.90 | Plan active |
| 08:30–09:00 | Range 100.70–101.05 | Sell stop at 100.65, stop above at 101.10 |
| 09:12 | Trades 100.65 | Filled 2 at 100.60 |
| 09:12–09:55 | Trades 100.40 at 09:55 | Buys back 1 at 100.40 (limit). Stop for the other moves to 100.60 |
| 09:55–10:40 | Never back to 100.60, trades 100.10 at 10:40 | Buys back the last 1 at 100.10 (limit) |
Result after costs: +0.20 point = +$20, +0.50 point = +$50, commissions −$10. Net +$60. Journal: "Both measures agreed, and the first period broke lower. Both exits were limits."
Replay B: failed
| Time (CT) | What happened | John |
|---|---|---|
| Pre-open | Letters 9 of 10 above, volume 88% above. Opens 100.85 | Plan active |
| 08:30–09:00 | Range 100.70–101.05 | Sell stop at 100.65, stop above at 101.10 |
| 09:05 | Trades 100.65 | Filled 2 at 100.60 |
| 09:05–09:40 | Turns up, trades 101.10 | Stop triggers, filled 101.15 |
| 09:40–15:00 | Rises above the overnight high to 101.80 | Done for the idea |
Result after costs: 2 × −0.55 point = −$110, commissions −$10. Net −$120. Journal: "The label said long inventory, and the session went the same way as the night. A label is not a forecast."
Replay C: no trade
| Time (CT) | What happened | John |
|---|---|---|
| Pre-open | Letters 8 of 10 above 100.00. Volume: 200 contracts above, 600 below (25% above). Opens 100.70 | Measures disagree: plan not active |
| 08:30–11:30 | Falls to 100.20 | Watches only |
Result: $0. Journal: "By letters it looked long, by volume it didn't. My rule needs both, so no trade, even though price fell."
Test it yourself
- Write your overnight window, reference price and weighting first (the lesson's first step).
- Replay every day the inventory condition was met, including the days the regular session kept going.
- Count the days letters and volume disagreed. If that's most days, the condition rarely applies.
Where it breaks
- Inventory is a label on a chart, not a record of who holds what.
- The regular session can continue the overnight direction (the failed replay).
- Letters and volume can disagree about the same night (the no-trade replay).
Calculators: position sizerisk/rewardexpectancy
Reflection question: When your plan uses a label, does it also say exactly how the label is measured?
Check yourself
- Eight of ten fictional overnight row-block letters are above prior settlement. What can an 80% TPO share-above label say, and what can it not say?
- Why might two readers describe the same overnight session’s inventory differently? Hint: what are they measuring?
- The regular session opens above the overnight high. Which reference sets would you use to describe that open? Hint: prior value, and the night’s range.
- Why can the same example be above-weighted by letters but below-weighted by volume?
Reflect on your own process
- Which reference does your written plan use for the overnight session, settlement or last trade, and is it labeled on your chart?
- If your TPO and volume measures disagree about the night, how does your journal record both without picking one after the fact?
- What would you need to see beyond a chart before writing that overnight traders held a position?
- When your plan uses a label, does it also say exactly how the label is measured?