Traders know that the Time Of The Day Trading Strategy is very effective because the majority of trading volume takes place at the open and close while the late morning and early afternoon sessions are relatively quiet. Trading outside of these busy hours is usually a dangerous idea for day traders.
Old research from Harris (1986) also revealed a time of day effect and showed that equities tend to rise in the first 45 minutes of trading except on Mondays.
In addition, stocks are more likely to rise towards the close on all days, particularly smaller cap stocks.
As well as this, there has been research to show an overnight effect. One study showed that investing in the S&P 500 only in the overnight session produced stronger returns with lower risk.
An explanation for the overnight anomaly is that companies release more of their important information after the market is closed and this is what moves markets most.
The Time Of The Day Trading Strategy chart below from Bespoke Investment Group shows how stock returns are concentrated in the final hour of trading and overnight.
The next chart from falkenblog shows how overnight returns in the S&P 500 have been well in excess of day returns. If you had not held trades overnight during this period you would have performed very poorly indeed:Finally, there is evidence from Haoyu Xu which postulates that stocks exhibit a momentum effect in the morning and a reversal effect in the afternoon.
In other words, if a stock trended lower in the morning it might reverse higher in the afternoon and vice versa.
The explanation for this is that morning trades are more likely to be information driven while afternoon trades are based on liquidity and dominated by institutional trading.
The conclusion for day traders is to focus on momentum strategies in the morning and reversal strategies in the afternoon.
Time Of The Day Trading Strategy:
You should be aware that markets behave differently at different times of the day and you can use this information to construct filters for intraday trading or timing entries.
The last hour and overnight session often sees the most positive price movement. Further, momentum trades should be preferred in the morning and reversals in the afternoon.
Although the Momentum Trend Trading Strategy can be applied powerfully to InterAnalyst’s Buy & Sell Trading Signals.