RULE: AVOID FIRST 30 MINUTES
CHART: Why We Never Trade in the First 30 Minutes
Therefore, I was intrigued by an article in yesterday’s Wall Street Journal entitled: Why Morning Is the Worst Time to Trade Stocks. The article did a great job of explaining why trading right at the market’s open can put traders at a disadvantage.
According to the article:
But within minutes, the gap between the price sellers want for a stock, known as the “ask” price, and what buyers are offering, the “bid,” shrinks sharply and continues to narrow up until the end of the trading session. This quirk in the market has been amplified in recent weeks amid the big market swings.”WSJ
This “gap” referred to in the article is known as the bid/ask spread. Put simply, it is the difference between the price at which buyers are willing to buy and sellers are willing to sell. Larger bid/ask spreads can hurt your returns as they often cause your trades to execute at a price that is different from the price that you had expected. This is a phenomenon known as slippage.
According to an analysis by the WSJ:
To avoid excessive slippage costs, it is best to wait for the volatilty at the market’s open to smooth out before you begin trading. That’s why I always sit out the first 30 minutes of the trading day. I wait for the market to smooth out and then begin looking for opportunities.
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