The First Hour of the Trading Day: Should You Avoid It?
Technology has turned us into a nonstop, 24/7 society. News and information flow never ceases, and you can buy almost anything you want, anytime you want, from the convenience of your smartphone.
And as a trader in this 24/7 society, you need to decide if it makes sense for you to be active as soon as the opening bell rings, or if the first hour should be on your avoid list.
It’s About That Time … and Day
The first hour of trading stands out from the rest because of the unique market mechanics that surround it. Overnight news flow often creates a pent-up demand for buy and sell orders, which get submitted premarket and are queued up and ready to execute as soon as the bell rings, often making trading during this time chaotic.
And this first-hour phenomenon can get supercharged when it comes to Mondays. Take a look at the hourly chart of most stocks or exchange-traded funds (ETFs), and you’ll likely see that much of the weekly volume occurs in the first hour on Monday. The extra time between the close on Friday and Monday’s open allows for more potential market-moving news and events to develop, which, in turn, may increase the number of participants who want to submit buy and sell orders.
This rush to execute often creates exaggerated moves out of the gate, many of which may not hold and could possibly retrace later in the day. So does it even make sense to trade during the first hour? Well, like most things related to the stock market, there’s not a one-size-fits-all answer to that question.
Create Your Own Rules to Fit Your Trading
Generally speaking, day traders need volatility to make money, and the first hour on Monday can be volatile. So, if you’re an experienced trader looking for short-term plays, you might consider being active at that time. But for longer-term investors, the Monday open might be a time to sit back and wait until things settle down before getting involved.
When it comes to the rest of the week, though, because the market is closed only during those overnight hours, fewer orders may be lined up for execution at the open, so it might only be a few minutes before the market calms down.
And we’re not just talking about opening orders here. If you’re closing out a position, either because a profit target or a loss tolerance level has been hit, the first hour of the trading day can be a bit hairy. Using market orders during this time of day can sometimes lead to price slippage. And just because the market trades at your price, a limit order doesn’t guarantee execution. And remember, a stop market order will not guarantee an execution at or near the activation price. Once activated, a stop market order competes with other incoming market orders.
If you feel that you must trade during the first hour, you may be more comfortable trading well-capitalized, liquid stocks, perhaps those with average daily volume of a million shares a day or more. These stocks generally have tighter bid and ask spreads and may be better able to absorb the initial burst of buy and sell orders.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.