If you’re on the lookout to trade a hot stock pick, you’re constantly looking for an edge. One thing I don’t see discussed much is the concept that all parts of the trading day are not equal. Let’s see how this looks by walking through a day in the market.
I’ve heard a number of ways of breaking up the trading day and some of the common characteristics of each trading period in the day.
You’ve probably observed that prices before 10:00 a. m. tend to be volatile and somewhat unpredictable. Some call this “amateur hour, ” but I think of it more as the market trying to absorb overnight orders. It takes awhile to match up the pent up supply and demand.
The 10:00 a. m. reports come out just about the time the market is ready to settle down. It takes more time for the market to digest that stimuli on days when a report with unexpected news comes out. How can you tell that it’s unexpected? Simple. The market makes a few gyrations (pardon the highly technical term) before it settles down from the news.
After the market settles down from the 10:00 a. m. period, it tends to act in a stable, predictable manner as it goes into the lunchtime lull.
Watch out for the lunch time lull, which on most days is between noon and 1:00 p. m. The lunchtime lull tends to either have very little price movement, or sometimes a couple of low volume, erratic moves.
Of note is that the morning market and the afternoon market could have considerably different “personalities. ” The morning market might have rapid up moves and the afternoon market could drift lower, for example. The morning and afternoon periods are separated by the lunchtime lull.
The afternoon session builds in volume and volatility as the afternoon progresses. There is often a crescendo of activity about half an hour before the close. This is also the time that the market might reverse its afternoon trend.
Of course, sometimes there is a spike of activity in the minute or two before the close.
It’s helpful to note the opening range in the morning, as well as the range during the lunchtime lull. There are trading systems that are based on trading breakouts from these ranges. The exact duration of these ranges is something you can experiment with.
See if these observations speak to you the next time you have a chance to watch the market in action throughout the day.
As one of the Directors of Investing Systems Network, Mr. Newberry consults on the development of portfolio management software and tools to find a hot stock pick . Investing Systems Network makes sure its products have a high degree of usability, and makes them available to investors in at least 70 countries.