Thursday, September 12, 2013

When is the best time to trade?

All traders know that the markets are open from 9:30 a.m. to 4 p.m. New York time.

Traders who pay close attention know that most often, the opening bell sounds after a stock has had its major movement of the day, and quite often the closing bell signals the beginning of wild price gyrations after the market is closed.

Such is the nature of extended-hours trading.

The pre-market session runs from 7 a.m. to 9:30 a.m., and the after-market hours are 4 p.m. to 8 p.m.

The extended hours were initially set up to accommodate high net worth traders, and although anyone can trade the extended hours, they are still the playground of the institutions, whose resources are so large that they almost single-handedly can determine the market for a stock or fund.

Extended hours trading is illiquid with wide spreads and high volatility, not the ideal environment for private traders to operate in. That's why I avoid the extended hours.

Most earnings announcements and major government economic reports are published during the extended session, and it is during those sessions that traders first react to the news.

The "normal" trading day, 9:30 a.m. to 4 p.m., lasts 6-1/2 hours and so is made up of 13 half-hour periods.

Only two of those half hours really matter.

The first half hour is sometimes derisively called "amateur hour" because that is when overnight orders are filled. People who don't trade for a living -- people with a day job and a life -- often must place their orders outside of normal hours, and the first half hour is when those orders get filled.

The last half hour is when the pros place their trades, having formed an opinion of where the price ought to be on any given day, given the totality of information available. If there is something in the wind that calls for caution, it will appear in the last half hour, from 3:30 p.m. to 4 p.m.

And the other 12 half hours? Not much happens, really, except perhaps for daytraders, who hang on to every tick of the price. That's not how I trade.

The first and the last half hours also tend to be where much of the day's volume is concentrated. More volume means narrower spreads and easier fills.

The issue of when to trade came up as I thought through my lessons learned from WLK, a trade that hit its stop/loss point on the second trading day after I opened the position upon a downgrade by a major brokerage house. (See my updated initial-entry posting here.)

Whenever a trade goes wrong, or right, for that matter, I look at it in an effort to understand how I can improve my game.

WLK began to move contrary to its bull signal 75 minutes into the trading day on the day I opened the position, but of course it was only in the last half hour that it became clear that the bearish intra-day move was the market's final thought the stock's prospects.

Had I looked at WLK in the last half hour of Sept. 9, I might well have concluded that the very near term uptrend was faltering and foregone the trade. Or perhaps not.;

My practice heretofore has been to do my analysis and place my trades when it is complete. In light of WLK, I've concluded that my practice must change.

Going forward, I shall do my analysis during the day. I have no choice. It takes about 45 minutes to analyze a stock, and so I can't do them all late in the day.

Rather than trading immediately, I'll state my intention regarding a trade in the "Decision for my account" section of the analysis.

I'll actually place the trade, if it still looks like a trade I want to take, in the last half hour of the regular session, and shall update my analysis with what action I actually took, including details of the position structure or reasons why I didn't open a position.

As part of this practice, I'll no longer be including the paragraph about the fair-price zone and most-traded price.

This is a paragraph that reads something like
The fair-price zone on today's 30-minute chart runs from $105.94 to $106.99, encompassing 68.2% of transactions surrounding the most-traded price, $106.23. WLK opened near the zone floor this morning, rose to the ceiling in the first hour, fell to the floor, and then rose to the ceiling again.
and is taken from an analytical tool called the Time Price Opportunity Profile. It is the best tool I have for assessing where trading is in relation to where it was, because it combines trading activity and the price.

But it is clearly of use only at the time I actually trade. I'll be referring to it as I make my final trading decision in the last half hour, but will remove it from the write-up.

Circumstances, of course, alter plans. Although my preference will be to trade in the last half hour, a movement during the day (such as what happened to AAPL on Sept. 10 after the new, cheaper iPhones were announced) may well prompt me to make an intra-day trade.

Some important non-governmental economic reports are released during the regular trading day, and the Federal Reserve for some reason has a fondness for announcing important news at 2 p.m. Those events might also prompt me to trade at mid-day rather than waiting for the closing half hour.

My changed practice adds an additional layer of caution to the trading process. It is so tempting, given the ease of trading in our age, to find what looks like a decent trade and to exclaim "Booyah!!!" as I pull the figurative trigger that send the order to the markets.

At heart, I'm convinced, private traders see themselves as shoot-from-the-hip adventurers, sort of like Malcom Reynolds in the Joss Whedon TV series Firefly. Adventurers with hearts of gold, of course.

Yet sometimes, slow trading is better.

Note that my preference for the last half hour applies only to opening new positions. I shall close a position that has produced an exit signal whenever seems best, whatever the time of day.

My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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