The time of day at which you trade stocks can drastically affect your profitability, since each hour of the trading day has a particular tendency. By trading only the most active hours of the day and utilizing a strategy designed to profit from volatility -- such as one focused on short-term trends -- you're trading efficiently. Your time commitment is limited to only the hours with the greatest profit potential, giving you the rest of day to focus on other endeavors.
Volatility is a nasty word to investors, but to short-term traders it means profit potential. As a short-term trader, profits should come quickly, otherwise capital is not being utilized effectively. Volatility is the variance in price over a particular time period. The greater the volatility the more opportunity you have to enter and exit positions quickly, hopefully with a profit. Two hours of the day have a tendency to be more volatile than others.
Near the Open
The first hour of trading, beginning at 9:30 a.m. Eastern Time, is the most volatile of the day, with floods of orders based on overnight-night news and analysis. This creates large price swings in a short amount of time. While movement can seem erratic, trends or ranges will develop. The first 20 to 30 minutes sets the initial trend, which is often followed by a significant pullback or reversal near 10 a.m.
Near the Close
The last hour of trading, beginning at 3 p.m. Eastern Time, is the second most volatile hour of the day. Strong trending days are likely to see a pullback within approximately 30 minutes of the 4 p.m. close as short-term traders lock in profits. Price movements can be erratic in the last half hour as mutual funds and hedge funds buy or sell large blocks of shares before the market closes. Profit potential exists if you stay nimble and realize the trend may change -- often quickly -- multiple times within the hour.
Volatility presents opportunity, but it also presents risk. Quick and large price movements produce profits as well as losses, so risk control measures such as a stop-loss order on trades is recommended. If you don't like the amount of action associated with the first and last hour of day, trade from 10:30 a.m. to noon or 1 to 2 p.m. These hours still present some profit potential, but the movements are likely be slower and you're reflexes don't need to be quite as quick.
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