Many traders focus all of their efforts on the first and last hours of the market day. These two segments often produce more than 60% of a session’s total volume, and most of its price movement. The same folks walk away from their screens during the midday markets because they assume there’s little or no opportunity.
This is a big mistake. The midday markets are a great time to play slow-lane strategies that take advantage of the crowd’s impatience. Trade fills during this period also benefit from compressed spreads and more favorable reward-to-risk ratios. Moreover, it’s easier to make profitable decisions after watching the bull-bear struggle that guides the first hour of trading.
First-hour ranges set up natural observation levels for midday traders. A late-morning breakout through the first-hour range signals a trending market. This thrust can trigger a series of moves in the direction of the break. Alternatively, when price remains stuck in its first-hour range into the lunch hour, it’s unlikely the midday crowd will have the power to break its support or resistance. Midday price action often tests the trends established in the first hour.
As the day progresses, a significant reversal of first-hour sentiment becomes less likely. While this early trend remains dominant on most days, midday shocks still generate contrary price movement. These sudden events can shake weak hands out of very good positions. Here’s an example. An opening gap sends a market higher and attracts heavy volume. Price holds its own for a few hours after the opening, but then sells off with no warning during a midday shock. Midday traders can jump quickly into this falling market and take the stock at very advantageous prices. Watch out for trouble during Wall Street’s lunchtime period. As the big boys head out to fill their stomachs, the second squad plays a variety of games to generate volume and test supply and demand. Sharp whipsaws or short squeezes often characterize this midday testing period.
The bottom line: Trust nothing you see or hear during the lunch hour. But the lunch hour provides attractive exits when the games benefit open positions. Opposing trends often stop dead in their tracks just before noon so that their peculiar influence can rise to the surface. Take a moment to guess which side has the biggest target on its back at this time, and then skew your trading to take advantage of the weakest hands. The midday markets present one common danger to the bottom line.
Trades taken during this period must show sufficient movement to generate profits or losses. New positions lacking volatility generate risk as the last hour draws near. The trick is to get a few cents in your favor before other traders return from their golf games. You’ll probably need that breathing room to keep the position into the closing bell. Dead markets work fine when you’re building longer-term positions. But they rob profits if you’re looking for a quick buck.
Examine early volume to decide whether anyone really cares about the stock you want to trade. Measure short-term price movement as compared to prior days. Narrow ranges can subject intraday positions to significant end-of-day risk. Many eyes watch markets that are trading near their highs or lows. Movement into these price levels will invite the crowd to jump in or head for the exits. But don’t be fooled by small penetrations of these intraday extremes. Professionals know that stops build up at these levels and will take them out, regardless of their ultimate positioning. Experience suggests the best midday results come from buying weakness on uptrends or selling strength on downtrends. This acknowledges how difficult it is to transform a range-bound market into a trending one.
Because 80% of all price movement is range-bound, fading the edges plays the highest midday odds. Professionals measure supply and demand during the 2:30 p.m. EST to 3 p.m. time period in anticipation of a rally or selloff in the last hour. Midday traders should terminate positions if their short-term strategies can’t capitalize on the market’s final hour. Still, if you are able to stay positioned into the madness can work out very well. This volatile period often provides unexpected opportunities for very profitable exits.
