The Stock Market works by Day, but loves the Night

I am a long-term investor. While I enjoy looking at market prices, I do not however monitor price movement day in, day out. Usually, I would only check once for the day, on the market open versus previous day close. Unless you are trading, not investing.

As I mentioned early, Time in the Market versus timing the market. On a daily top-bottom fluctuation, would the range so significant that you have to persist in catching the “lowest price” possible for the day?

The Stock Market Works by Day, but It Loves the Night

Why is the Market Open important for me?

Price movement of the market is dependent on information absorbed, underlying assessment and subsequent actions taken by people. Prior to the market open, information from both overnight and international markets is weighed in and acted upon by traders/institutions. Traders calculate how intake of new information will affect the first few minutes of trading. Investors place pre-market open orders with their brokers after reading the news. Hedge/mutual fund traders may either be actively involved or sitting on the sidelines.

The market open is hence my first chance of getting a clue as to what the market thinks for the day. While it does not determine market direction (up or down), it helps me determine if the market is likely to be trending, ranging , volatile or sedate over the course of the session.

Opening Volume

Opening volume is generally only rivaled by closing volume – both being comparatively higher as compared to the rest of the day. Therefore, opening volume must be compared against other opening volumes for insights (rather than intra-day volumes).

High volume generally infers increased volatility and greater (likely) price movements. It may also indicate the involvement of institutions, thus higher probability of daily sustainable trends.

Low volume generally indicates involvement of primarily short-term traders, thus higher probability of a ranging day.

Trade Sizes

Size of the trades is also an important consideration for further insight. When volume is filtered by size, while small orders may make up most of the trades, large orders on the other hand account for most of the overall volume. Trending occurs if large orders manage to sustain themselves in a particular direction.

Large orders may happen on both sides of the market – this indicates short-term range bound. We can sure however as one side is conquered by the other, a trending move will occur. Minimal large orders may indicate more ranging movements instead.

Day-to-day gaps and International Markets

I personally note how far market open prices have moved from previous close on news or correlations with other markets. Aggressive moves in correlated markets may provide insight into possible market movements when it opens.

For example, did these correlated markets experienced severe declines or breakouts? Did oil, gold, silver, bonds and even currencies have unexpected movements? The market pricing will adjust according to their correlation with these markets. Little overnight action in other markets may indicate passivity and likely to be range-bound unless some drastic information feeds in during the day.

Conclusion

The first few moments of market open provide a lot of information and when collated, it help us to determine what type of market day it is likely to be. How do you invest differently from me?

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