When looking to trade the market, most people don’t realize there is a difference in the time of day that definitely affects how stocks act. Not using this information makes it harder to make money through any type of trading, short term, long term, or even day trading. In addition to time of day, whatever method you employ, whether a trading system or just some tools, will also have certain times of the day where they tend to work better or worse. This type of action can only be discovered by tracking the signals or stock picks that are flagged, then seeing over time when the best use is.
The first 30 minutes is usually the craziest time. Stocks will have bigger swings, up and down as a lot of times there are not established orders from larger mutual and hedge funds in the names to counter this volatility. It is a great time for daytrading and short term trading of stocks because of the increased volatility, but with that also comes increased risk of a stopout. Also there is not much in terms of support and resistance created yet, but you can look at the last hour of the prior day for guidance there. Sometimes using a stock trading system can be of assistance when the market has increased volatility, assuming you have thoroughly researched and tracked the trading ideas it might send out.
From 10am EST until about 11:30-45 EST is prime time for trends to develop. These times are not exact, and shift around some but in general this is when a decent, continuing trend will try to develop. Also the volatility calms down alot, making it easier to put in a stop that is closer to the actual price when day trading. For longer term investing, usually this is not the time to make a decision on entrance, its too early in the day. The exception would be an entrance based off of daily breakout of resistance or support, or some key fundimental data that is just starting to push the stock. Entry when that happens is ok during this time.
From about 11:30 until 1:15pm EST stuff usually slows down alot, and fake moves can happen. What I mean by fake moves is stuff will look weak, then rally up sharply, or stuff will look strong (like it will continue) and then abruptly sell off. Most of this is just due to decreased volume and liquidity. Program trading bots and Algorithm trading bots love this period of time. Basically they try to fade every move. This also makes it very difficult for most traders, as it will seem just when a move gets started, it abruptly ends. Of course there are enough names that do really move and keep going, but these are impossible for the most part to sort out from the ones that stop and reverse until the move is too late.
Stuff will generally pick up after 1:15 for about 45 min or so, then slow down again near 2pm EST. 2:30PM EST (for whatever reason) is a key time to watch. Countless times the market will put in a top or bottom near this time and then reverse into the close. Does it happen all the time? no. But it does happen enough of the time its well worth paying attention to. Volume should pick up after about 3-315 EST into the close, whether there is a 2:30 reversal or not. This is again a good time for short term trading, AND its good for watching for longer term additions as you can see if the stock is holding gains, pushed above key resistance, has made a major reversal on daily chart etc.
Using the Futures to Help With Entry Timing
Most people have heard of the futures market, and it does get mentioned on news shows such as CNBC or MSNBC. However, a lot of people dont understand what the futures market is. Its actually quite simple. The futures market is simply a bet on where an index will be as of a specified date in the future (hence futures market). It is no different than saying ” I think GE will be 5 points higher in 3 months”. Now imagine thousands or people, or even hundreds of thousands all betting on where GE will be in 3 months. Not tomorrow, 3 months from now.
This aggregate valuation call would be considered a futures market. It may be higher or lower than where GE is now, but you also have to consider the people have 3 months to be right – that is a lot of time. This time has a value – the more time you have to be right, the easier the call is. So the market puts this time value into the price of the futures, and each day that goes by a bit of it decays (goes away) as it gets closer to the 3 month time. This 3 month time in this example is a fixed time, it does not scroll forward. So if the bet is the 31st of July, 2 weeks from now the GE bet would still be based on the 31st of July, but the time value associated with that bet would be a bit lower because there is less time left to be right (or wrong).
This basic concept is then carried over to the stock indexes. People make bets based on all available information, and bets based on anticipated information and research for where the indexes might be in the future. One thing to remember is at the expiration date, the futures contract AND the cash contract (the index) will be identical. So if the S&P 500 index is at 1400 on expiration, so will the futures contract trade to this price. Because of this fact, there is what is called arbitrage between the 2 (cash vs futures) since they trade separately. I can make a bet on the futures market (buying or selling) without doing anything with the cash index. On the same note, I can buy a large basket (or sell) of stocks in the index, without doing anything with the futures market. This give and take causes the 2 of them to fluctuate independently.
If the futures get too high (people buying futures but not stocks), there is free money there since at expiration futures and cash are equal. So you can sell the futures, then buy the basket of stocks that make up the index and lock in free money if you hold it until expiration. By selling the futures, you have agreed in principal to sell the basket of stocks comprising the index at that futures price. If the futures are 1430 and the cash is 1400, and the time value is 20, theoreticaly the futures should be at 1420. At 1430, I can sell the futures, then buy the stocks and lock in 10 points for free. In reality its not this easy, but this is the basic concept.
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