What is the best time of day to trade stocks? The answer may surprise you.
The best time of day to trade stocks is not at market open for the average amateur trader. Professional traders will often fade stocks at market open. For example, if the market gaps up and rises, professional traders will short the market for the anticipated move down. If the market gaps down and falls, professional traders will go long the market for the anticipated move up.
Let us take a look at a trade I made today, and lost 5% on for not respecting the best time of the day to trade rule. The best you can do is limit your losses with a disciplined stop loss and then learn from your mistakes. A wise trader will learn from the mistakes of others so that he doesn't make the same mistakes.
I was intrigued by the +143% revenue growth of RCON from my watch list. The chart on Finviz looked sweet and had a candle over candle at market open (ultimately by the close of the day, the big green candle turned into a red spinning top). Click on the chart below to enlarge:
RCON is in the oil and gas services sector and sells fracking equipment in China and I liked that. The catalyst is the annual shareholder meeting conference call scheduled for June 30, 2014 and the possibility that it will run up this week. Even the Finviz chart looked like a sweet pullback with a candle over candle reversal. I jumped in quickly because it started to run. However, the trade turned into a horrible one with me effectively buying high, then selling low as my -5% stop loss kicked in:
The biggest mistake I made was in getting greedy with the gap up open and the early price action. It's usually not a good time to buy stocks at market open because professionals will fade the open. I know this. You know this. I saw the stock start to run away from me and I was afraid I'd miss out on the run up. My emotions got the better of me.
The next big mistake I made was in putting too much of an emphasis on the +143% revenue growth. RCON is already up +141% over the last 52 weeks. The P/E ratio was 49.7. In other words, the +143% revenue growth is meaningless. It's already priced in to the stock.
The only thing I did right was stick to a disciplined -5% stop loss strategy; however, if a stop loss is the only thing you get right, you're sure to take loss after loss and eventually go broke. As a trader, you have to get more things right than simply your stop loss.
The best time of day to trade stocks is during the middle of the day when markets are most calm and traders are waiting for further news to be announced. Most of the day's (and overnight) news has already been factored into stock prices and so the main focus of traders is on where the market is headed for the remainder of the day. Because prices are relatively stable during this period, it's a good time for amateur traders to place trades. Had I waited for the middle of the day before evaluating whether or not to take an entry in RCON, I would have had a completely different opinion on the stock. Instead of feeling rushed because the stock was rising fast (like I did at market open), I would have seen a stock that had sold off since market open and that was in a down trend. That fact alone would have prevented me from taking an entry in the stock because the candle over candle pattern forming on the daily candlestick would have been seriously in doubt in addition to the stock trending lower.
Could've… would've… should've…