When the futures market open for trading on Sunday at 3pm EST and Monday through Thursday at 4pm EST, there is a slew of activity from traders who want to take advantage of a thin market. These pajama traders, a term coined by Jim Cramer, lose more than win.

We’ll get to the “why” in a moment. First, let’s look at the exceptions. There has been some fantastic trading action overnight. Witness the big fall and subsequent rise during the Brexit vote in June 2016 and the US election later that same year. This is rare; meaningful turnover consistently occurs during regular trading hours.

Why pajamas traders lose

Now let’s talk about why pajama traders lose more than win. During overnight sessions (in the US), opening trades are made in Asia, followed by Europe. There could very well be big movements in the markets, which is important information to have on hand. You can determine if the following day will be a “risk off” day simply by looking at the action in Europe, China and Japan. You can also look at indicators like volatility futures, bonds, gold and the Japanese yen. If these indicators are up, it stands to reason our equity markets will be lower, at least to start.

However, we all know that fear and greed – not reason – guides traders. What happens overnight is not always an indication of where market action will head. Just the other day, futures were down sharply but rallied to end the day near highs of the session (25 SPX points higher). That’s pretty strong – a nearly a 1% move off the bottom.

Could pajama traders have made some nice coin picking up the dip overnight? Absolutely, but as I said above, those opportunities are rare. Money flow during overnight trading is thin and price action tends to be tricky. If you are tempted to trade, you are at a disadvantage. You are gambling against the house, which is positioned to win.

While it may seem I am completely against pajama traders and overnight trading, I’m not. There are some very savvy traders who consistently win. For the great majority of us, the best odds of winning are during regular hours after a good night’s sleep.

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