Traditionally, one of the long-lasting market clichés is that the “amateurs open the market the professionals close it”.
Although this may be a little simplistic, there is no doubt that commonly trading volume in equity markets is at it’s highest at the beginning and the end of the day, but of course there are active market participants throughout.
However, it is worth perhaps exploring this thinking in a little more detail, and look at the two key reasons why many experienced traders choose to do the majority of their entries into new positions (and potentially exit) in the last hour of a trading session.
The majority of traders who use some sort of technical analysis for trading, ideally would like as complete information as is possible before taking action.
Without exception, we have all seen volatility within a specific incomplete price bar/candle where it appears to start in one direction only to close in the opposite.
It is generally desirable that entry is early in the beginning of a new technical trend but you are balancing this with having the optimum chance of that new trend being confirmed (i.e. by closing price in a time period) or your willingness to accept the risk that if intra-bar then the price may move from its current point to a place which would have failed to meet entry criteria.
Logically, if one accepts the general market belief the closing price of a particular time period is the most important (and its relationship to opening price), then if trading a daily timeframe the end of the session is the time where you are closest to that complete information, when the candle is almost matured in formation.
Additionally, the majority of technical indicators have price as part of their calculation, again one could term this a mature price (i.e. towards the end of the session). Consequently, logically this will give the optimum chance of a ‘complete” technical picture being formed.
Let’s give a couple of examples to help illustrate this further.
Imagine one of the entry strategies you use is a breakthrough a key price point (e.g. support/resistance). A close price above this can be more assured towards the end of a trading period than towards the beginning where there is still significant time before candle maturity.
Alternatively, you have a moving average cross as one of your strategies. This is of course based on an average of prices over a specific time period. At the point of cross many traders with this strategy would choose to act, but again prior to a mature price within that daily session there is a chance of a price move which would not demonstrate a cross.
Clearly with set open and close times of equity markets, the next day’s open will be determined by what happens in Europe and more commonly more so in the US overnight.Much of this is unpredictable of course with the market response to any released economic data and events unknown.
However, if one accepts that decision-making regarding risk and opportunity is best made with as much information as possible.
We know already what data points are to be released overnight and this can indicate, to some degree, potential risks that may exist to any existing market trend. This is no different irrespective of what time within a trading session you take action. Additionally, other variables such as the VIX index and current market trends are known.
However, towards the end of the equity trading day in Australia it is possible to get a more tangible “update” as to what may happen as”
a. European markets are close to opening time
b. US equity market futures are beginning to mature in light of Asian market action.
c. Commodity price movements are establishing which of course is relevant should you hold stocks in this sector.
Again, let’s use a practical example to illustrate meaning.
If towards the end of the session, you see a potential long technical trading opportunity on a materials stock e.g. BHP
If you are position sizing with risk in mind consider the these two scenarios:
a. The European futures are indicating a strong positive open.
b. US futures are positive and have moved higher during the Asian session.
c. The economic data due is not strongly market sensitive.
d. Copper futures re also positive.
a. European and US futures are near neutral.
b. There is an interest rate decision from the US Federal reserve due overnight.
c. Copper futures are negative.
Of course, you can also compare this with a potential trade earlier in the day where:
a. There is an interest rate decision from the Fed due overnight.
b. As it is early in the Asian session there is no obvious movement in US/European or commodity futures yet.
Clearly there is a different risk profile between scenarios 1 and 2 which may logically lead you to position size differently or even wait until the overnight action has passed and then act on the following day if scenario 2 is the case.
Additionally of course, if looking at the level of information you have (or rather don’t have) if traded early in the session, you can see how these extra clues can offer some extra guidance as to what may be the optimum decision for you.
Ultimately, of course you have choices to make.
You could choose to restrict your trading activity to the last hour, or not.
If you are to follow the thinking that towards the end of the session is right for you right now, than you need to make the decision as to what “clues” are going to be part of your decision making and what they mean in terms of entry, and if so position sizing.
If you are going to delay entry in light of potential overnight action, does this mean that if you do get confirmation at the beginning of the next trading day do you then take action.
And then of course, our focus here has been on entries, logically do you adopt the same philosophy when looking at exits from any open positions (note: if you have set a profit target the majority of traders would adopt and anytime “hit” of that target).
And finally, what ever you choose, the reality is that you need to “plant your flag” right now and articulate it within your trading plan. Follow through and trade it, and then you can start to test the alternatives.
The articles are from GO Markets analysts based on their independent analysis. Views expressed are of the their own and of a ‘general’ nature. Advice (if any) are not based on the readers personal objectives, financial situation or needs. Readers should therefore consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice