When trading intraday or even when we are looking to enter a swing trade, knowing what is happening due to the time of day is something we should concern ourselves with. We know that placing trades before major announcements like economic data or earnings is extremely risky. But entering a trade before a typical reversal period could prove disastrous as well.
In previous articles I have discussed the pre-open and call auction that dictates the gaps and some price movement in the morning. There are other times that you need to be aware of as well. After the initial rush of orders being filled at the open, there will usually be a small reversal in price. Do not get caught up with the amateurs and jump in at the open unless you are trading a specific strategy.
If there is an overall bullish sentiment amongst investors due to the trend, news or earnings, then there will be a flood of buy orders to be filled at the open. Most of the orders will be filled in the call auction of the pre-open. There may be enough orders that flow into the regular trading session to cause price to temporarily rise. What you have to remember though is that the gap up is caused because of the need to find sellers to absorb all of the buy orders. Once they have, then you will typically see a reversal of price anywhere between five to fifteen minutes after the market opens.
That reversal can be short lived as the overall sentiment of the day will take price in the direction of the dominant trend. However, this correction offers an excellent opportunity for the astute trader to get a better entry price for their trade. Watching and anticipating this is critical.
After 9:30 to 9:45 AM, the trend of the day should become more apparent and trading becomes easier for newer traders. This is until approximately 11:00 AM. What happens at that time? Well, volume and liquidity become an issue. Most of the orders have been filled at the open and trading volume becomes light. Many economic data releases are put out at the 11:00 AM to noon window and it is wise to wait and see the market’s reaction to these before entering new positions.
Even if there isn’t a scheduled data release, many traders will wait until the European open to get further direction. The markets react to one another globally and when the other Asian indexes are closed there is a lull until Europe comes online. When volume gets light, you can usually expect some nervous traders to exit positions and cause another small reversal in price.
There is a saying, “Amateurs open the markets but professionals close it.” After the flood of amateur orders at the open, the professionals, including FII and domestic fund managers, look to see the average price and trend of the day and try to work their orders to get a good price. This means that even though they place their orders with the brokers throughout the day, the orders may not be filled until after 2 PM when Europe is open and traders return from lunch. This is also an excellent time for you to join the trend of the day.
Be careful in the last 30 minutes of the trading day. If there was a strong trend for the day, you will often see a reversal from traders squaring off their positions but this cannot be counted on as sometimes it will not occur.
So now you have a little more information as to what occurs during the trading day. For more details and strategies on how to trade the times, come take one of our courses at Online Trading Academy and join me in the Extended Learning Track India online.