While many markets are now dominated by electronic trade, the day sessions still have much importance. Think for a moment of all the largest players in today’s financial markets: banks, hedge funds, pensions, wealth managers and even central banks. Do you think they are doing their business in the middle of the night?
While these large financial players may trade at night, the majority of their activity still appears to occur during the day session hours. Because of this, paying attention to the opening of the day session may potentially provide clues as to market sentiment and possibly even direction for the day.
It’s no secret that institutions drive the market, and as a retail trader you want to pay attention to what these participants are doing. For example, if crude oil opens up and hedge funds are buying oil futures right out of the gate, it could potentially lead to higher prices in which case you may want to be long. On the other hand, if the corn market opens and institutions are selling corn heavily, you may want to be on the short side of the trade.
Paying attention to the open may potentially help keep you on the right side of the trade for the day.
Let’s look at a few simple guidelines that could potentially lead to better trading results:
- If the market opens for the day and begins trading above the opening price or range, look for long setups.
- If the market opens for the day and begins trading below the opening price or range, look for short setups.
- If you are long and the market falls below the opening price or range, consider closing your position.
- If you are short and the market climbs above the opening price or range, consider closing your position.
The opening price or range may also potentially be used as a trade entry point. For example, if shares of stock ABC open the day at $30.40 and trade immediately up to $30.80, you could look to buy a pullback to the open. In another example, if shares of stock XYZ open at $81 and decline following the open to $80.10, you could look to sell a return to the open.
Buying or selling the open may potentially provide some trade setups with a favorable risk/reward scenario. If you buy the open, you can place a sell-stop order just below the open or simply exit the position if price declines below the open. The reverse could be done for selling the open.
The day session open and how price reacts to the open can potentially provide some very good clues about the market’s intentions for the day. With the potential for good risk/reward ratios and significant market moves, going with the flow from the open may help keep you on the right side of the trade for the day.
Combined with patience and good risk management, the opening bell can be a powerful tool in the trader’s toolbox.
