Trading the opening session of the market
The opening hour of a trading session is often found to offer lucrative trading opportunities. Traders prefer to trade the first hour of the trading session because the market are very volatile. This creates a lot of training opportunities that can be exploited.
If you simply search around Internet, you will find quite a few trading strategies, that can guide you on how to trade this volatile first hour of trading. The strategies can be applied across different markets because you are basically day trading. The concept of technical analysis remains the same for the short term.
The main difference is of course on the fundamentals that determine the movement of the security. Therefore, to be a successful day trader, you need to be proficient in both technical analysis as well as fundamental analysis.
If you think that you can make huge profits by cleaning just the opening hour of the markets, while not paying attention to the technical and fundamental aspects, you can end up losing a lot of money.
While there are many trading strategies that exploit the first hour of trading, it has more prominent in the stock market and futures markets. This is because trading is conducted during fixed periods of time. As a result, when the markets open, traders can be seen initiating new positions at the market open.
Trading the first hour of the opening session is also commonly found in the forex markets. However, it is not that similar to the opening hours of the stocks of the futures market. Traders prefer to trade the first hour of the opening session because the markets are volatile, and it creates lots of short term trading opportunities.
One can expect to make significant profits by just spending few hours a day trading the first hour of the opening session. Although there are many opportunities to exploit during the first 60 minutes, it can be equally risky.
Just like you have the potential to make huge profits within the first hour of trading, there is also the potential to post huge losses during the same time. Traders need to be adequately prepared when the markets open.
Depending on the type of market that you are trading during the first hour, you can take the necessary preparations beforehand. By following the simple procedure, you can avoid taking undue losses. It also takes a special kind of character to be successful in training this first hour. Not all traders are accustomed this kind of trading. It requires skills of trading and technical analysis as well as the ability to move in and out of positions quickly.
Therefore, while day trading the first hour of the opening session can be a strategy unto itself you need to have the right mindset and psychological skills to be able to make profit.
As we outlined before, there are multiple markets which follow the same principle of the opening session. But it is in stocks and futures where you will see this being impacted to the maximum.
So now comes the question, what does it take to be successful in trading the opening session of the markets.
How to take advantage of the market’s opening trading session
As we mentioned earlier on in this article, it is the stocks and futures markets that are more suited for trading the opening hour. While this approach can be applied to the currency markets, not many traders will be able to follow due to the nature of how the currency markets work.
When it comes to stocks and futures markets however, due to the defined timeframes for trading, it is a lot easier. So, what are the characteristics of the markets that are more beneficial for trading the opening hours?
1. Defined trading periods: markets such as stocks and futures, unlike the currency markets, operate only for the specified period of time. Trading is conducted during the regular business hours. Therefore, when the market opens and closes the first hour and the last hour of trading will see a lot of activity as traders open and square off positions by the close of business day.
2. Pre-market and aftermarket hour trading activity: in the stock markets for example, many companies tend to release their earnings report after the market closes or before the market opens. This is done so that investors can read and digest the earnings report. As a result of this, institutional traders tend to place their bets in the market during the pre-market session or the aftermarket session. Because of this institutional activity, you would often find that stocks tend to gap higher or lower, when the official trading begins.
3. Liquidity: the liquidity in the market that you are trading, also plays an important role in the success of your trading during the first hour of the opening session. When liquidity is high, trading is a lot more easy. You can enter and exit the market with ease. The spreads that you find on the security are also lower. This leads to lower transaction cost as well.
4. Volatility: Volatility is another feature that is common to trading the first hour of the opening session. When the securities that you are trading are volatile, it is easier for you to day trade. This gives lots of trading opportunities for you. But, an important thing to note here is that you should not mistake volatility with liquidity. Sometimes securities can be volatile even with low liquidity. This can happen when there is a large order in the market. Securities can be very volatile, and this can lead to either huge profits or huge losses.
The above factors that we recovered are essential if you want to be successful in trading the first hour of the market open. Now that we have an understanding of the characteristics of what kind of markets trade during the first hour of trading, let us look at have you should prepare before the market opens.
How to prepare for trading the first hour of market open?
To be really successful in trading the first hour of market open, traders need to be adequately prepared. There are a number of things the traders need to look into even before the start trading the opening hour.
1. Fundamentals: you should first begin by looking at the fundamental landscape of the markets that your trading. For example, if you are trading stocks, you should look at how the markets behaved during the previous day. Market sentiment, which is nothing but the risk on risk of factor can change on a day-to-day basis. Therefore, you should always begin by understanding how the markets closed the previous day. Check if there are any important news events that influence the markets. You can focus on things such as earnings report from companies, any news that relates to regulations and so on depending on the type of sectors that you’re interested to trade.
2. Planning for the day ahead: you should also look into planning for the day ahead. Look for any news releases that might impact the markets during the first hour of trading. Typically, economic news releases are scheduled to be released during the first half of the trading day. Depending on the schedule, the markets can be volatile, or they can be flat. Thus, if you plan ahead you will know when a good trading opportunity arises. And the same time, this will keep you away from the markets when you notice that there will be a high impact news event.
3. Create a short list: The next step is to create a shortlist of securities that seemed to be the most ideal candidates for the trading day. By creating a shortlist of stocks, you will be able to know whether you are adequately funded or if you need to deposit additional funds. Creating the shortlist also helps in staying focused. Ideally, you should be choosing no more than 10 stocks to trade during the first hour. It is even more beneficial to you, if you can already prepare your pending orders for the stocks that you have shortlisted.
4. Technical analysis: After creating your shortlist of securities that you want to trade during the first hour of trading, you should immediately start analyzing the markets from a technical perspective. Apply your existing trading strategies depending on how the securities are behaving. Remember that you cannot apply the same trading strategy in different markets. If one of the shortlisted securities is trending strongly while another shortlisted security is trading sideways you cannot expect to be profitable by using the same strategy on both these securities.
5. Define your risk for the day: Risk management is also an important factor when it comes to trading. Therefore, after you have done your due diligence you should also look at the total potential loss that can be expected if all your trades for the day closed in the loss. This will give you an estimate of the total losses that can be expected. At the same time, you can also estimate the total profits that can be made for the day. Weigh these factors and revisit all your potential trade set ups before the market opens.
By following the above rules, you would be starting off your first day of trading on a planned and disciplined level. Sometimes it can be easy to get distracted by various new series is that come out over the course of the day. Therefore, to be successful in trading the first hour of the market open you need to have a lot of discipline. Many traders feel at this because it takes experience and practice to stay focused. The first hour of trading the markets can be very lucrative. For example, you can take your local stocks before the business day opens. If you are lucky enough to live in time zone that allows you to be at your trading desk while the US markets are opening it is even more better.
You should also be constantly evolving your trading strategy. Because the markets can behave differently it is quite possible that one strategy that work for you might not work again.
This happens for the simple reason that the markets can either be trending or they can be trading sideways. Therefore, choosing the right trading strategy is also important do your success in day trading the first hour.
You can basically follow the same principles do the futures market as well. Of course, this will depend on the type of security that you are trading. For example, if you were trading the currency futures, they might behave differently compared to trading commodity futures.
Day trading the first hour of market open - Conclusion
To conclude this article, day trading the first hour of the market open requires a completely different approach. This includes changing your trading strategy as well as your psychology. You will also need to dedicate a few hours before the market opens in order to prepare for the trading day ahead.
If you are successful enough in day trading the first hour of the market open, it is quite possible that you can make a decent profit just as you would, by swing trading or investing in the long term. You might have to tweak approach a little bit. You will also need to pay attention to the developments in the financial markets.
The risks can be maintained, and you can ensure that you can take huge profits by capitalizing on the market volatility and the liquidity that comes. However, we should reiterate the fact that day trading the market during the first hour of the market open can be risky.
It is ideal that you practice this approach to trading the markets using a demo trading account before you risk your real money. Having outlined the above, training the first hour of the market open can be a quick way for you to increase your capital.