Technical Analysis – looking at the time of day. Why is this important? What can we expect? How do we capitalize? I don’t believe this is quite understood. When the American markets open, everyone looks at them for direction.
Finally, a concept that I think is not quite understood as it should be, I really take a lot of focus on this, is the time of day.
Now, why is the time of day important? What can we expect at certain times of day? and how do we capitalise?
Let’s go back to the chart again and let’s have another little look. Generally speaking, volatility or volume is in a kind of smile format, if I look at a days’ worth of trade, that is what the volume is going to look like. So, we are going to get at the open, the stock exchange open we are going to get good volume, as a lot of participants come in, or institutions do a lot of jigging around, they do a lot of changing of their positions, adjusting of their positions, retail come in, so you get a lot of volume at the start of the day. Then as you move into lunchtime period volume starts to die off so you get that little low in volume, volume goes lower and as you come into the close volume picks up. That is why it is quite nice if you are European trader, to be able to trade that 7-9pm US session because volume is picking up a little bit.
Obviously, this is a generalisation and it doesn’t happen all the time, but this is where it becomes important to look at these things. So, time of day, why is time of day important? Time of day is important because you are going to notice a change in trend, a change in price direction very often at specific times of day. The DOW opens at 14:30 so all the European markets are going to suddenly change how they trade based on how the US market has opened. Obviously, that is within that 8pm to 4:30pm opening period of the European market. So, when the American market opens everyone starts looking at the American market for direction. If that suddenly rips to highs, then obviously, Europe is going to take notice and is probably going to rip to highs too.
So, very important to understand what other markets are opening during the market that you are trading, same with the currencies as the Stock Exchanges open, the currencies are going to be affected.
Then you have got things like lunch time, well the lunch time is quiet you are going to stay out of the trade because nobody is there, coming to the final hour of the day if it has been a busy day it may well be very, very busy going into that final hour because a lot of traders are positioning because they know that the bell is going to go in an hour or so, so they can’t then do the trades they want so they need to position now. It is the same with things like data, we are going to talk about economic data and how that comes out and affects the market in a later module, but understanding the time of day and how it is so important to the relationship of the market that you are trading. Just treating everything as the same is a mistake in my eyes, that you have to split the day up into chunks and understand the market moves differently in the morning straight away than it does at lunch time when it is quiet and everyone is having lunch or everyone is in meetings in the city and then in the evening in the US, the different relationships between the two are very, very important.
