There is a lot of volatility surrounding the open of the equity markets in any country or any exchange. It is often said that amateurs open the markets while professionals close it. The reason behind this saying is the nature of the order flow that comes into the exchanges and who is behind those orders at certain times of the day.
As a former trader for a brokerage, I saw this phenomenon firsthand. In the evening, the retail traders and investors would return home from work and see what the markets had done for the day. They would also absorb the news or tips from the television or newspapers and realize that they just had to buy the hottest stock first thing in the morning! When I would arrive in the morning to the broker’s office, I would be met with a large stack of orders from our retail customers. This was duplicated in brokers’ offices all across the world.
The Indian exchanges have recognized the volatility that this influx of order flow can create and have taken steps to reduce the dangers associated with the opening of the equity markets. They have recently changed the open to 9:15 am and have instituted a call option process to discover what is called the equilibrium price at the open. This equilibrium price is more reflective of the price that will satisfy the supply and demand that is being presented in each stock at the open and in theory, should cause the order flow to slow in the open as many of the traders and investors have had their desired orders filled.
The process is relatively simple; there is a period between 9:00 am and approximately 9:07 am where orders are accepted by the exchanges to buy or sell stock. Traders may cancel or modify their orders during this time as well. At a random time between 9:07 and 9:08 am, new orders will no longer be accepted and current orders cannot be modified or cancelled. The existing orders will then be used to determine the opening price based on the call auction.
From 9:08 to 9:15, the orders are reviewed and matched based on the price that would complete the maximum number of pending orders. This price is called the equilibrium price. It is determined by creating a demand curve and a supply curve and setting the opening price at the point where the two curves intersect. This is the price where the maximum number of traders would have their orders completed.
While this action was designed to lower the volatility created by the influx of orders received by the exchanges in the morning, it has also created gapping opportunities that are available for the intraday trader who knows how to take advantage of them.
In the Professional Trader course, we teach you how to identify strong supply and demand zones on price charts. If the Nifty looks like it will be gapping downward, we can check to see if it is gapping into a demand zone. If it is, there may be enough demand to absorb all of the supply before the open. This will cause the index to rise.
Stocks that are also gapping down into demand will make great candidates to trade the gap fill. We may be able to go long on them at the open and profit from that movement. I am simplifying the process and do not recommend that newer traders trade the open. I also do not recommend you do this unless you have a solid, proven strategy that also accounts for risk management.
If you are not one of those who know how to take advantage of this with a sound strategy, I welcome you to join us in our Professional Trader Course and learn how to benefit from trading the Indian equity markets.