The first hour after the market open is the most volatile time of day. It's a period of price discovery. It's possible to make huge gains in just a matter of minutes. However, it is also possible to lose a ton of money just as fast, so you need effective strategies with solid risk management to capitalize. Here are 3 ways you can capitalize on the volatility of the first hour of the trading day.
Pay Yourself Constantly
The open is so volatile that you can go from being up money to down money in seconds. Because of this, it is crucial that you're taking partial profits when you have a decent unrealized gain. You should plan out your exits in advance and use limit orders to exit your positions. The stocks will be moving so fast it is easy to miss an exit, and then have it come all the way back to your buy price.
Don’t Chase Strength
Most momentum stocks will trade with large range during the first hour of trading. It's normal to see 5-10% moves in a few minutes during this period. This means you have to be patient for your entries. You should wait for a stock to pull back to its moving averages or trade sideways for a few candles before entering. If you chase you will get burned badly, and you will kill your trading day early. You will lose all of the trading opportunity because you chased something, it reversed, and now your max loss is hit and you cannot trade.
Wait For Trend To Form
The first 5 minutes after the market opens is a crazy period. The stock has not formed a clear trend, since the market has just opened. Everyone is trying to get there orders in to react to the news. If you're a new trader, or someone who isn’t good at making high pressure decisions quickly, it's better to just wait 15 minutes after the market opens to enter a trade. Instead of guessing which way the stock will go as soon as it opens, wait for a little bit of confirmation and let a few candles form.
Pay Attention to Pre-Market Trend
The pre-market trend is a good indicator of how a stock will behave when the market opens. If you're long biased on a stock and it has faded 4 points off its post market highs, you will definitely want to wait for an obvious change of trend before entering. Pre/Post- market highs are usually good first targets for breakout trades. If the stock already got there once, it would make sense that for it to test that level again once it gives the buy signal.
Here is my full presentation on this subject at the London Investor Show.
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