Monday, May 18, 2009

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What is the Time to Trade in a Typical Trading Day?

A day in the life of a professional stock trader is never easy. Apart from the daily preparation that has to be done as part of the trading practice, the inefficient trading time creates lot of lost opportunities, confusion and kills the trader’s appetite to trade in the bear markets. Unlike other professionals who get a solid 8 hour work day, traders never get even half of that. The various events and broker inefficiencies only add to the woes.

what is the time to trade stocks in a day?Image Source

The actual market times for trading on the Bombay Stock Exchange and National Stock Exchange today are from 9:55 am to 4:00pm. This is the official timing during which the exchanges operate. It means there is a total trading time of 6 hours and 5 minutes in any given trading day. But the reality from a trader’s perspective is quite different. Though the market timing is 6 hours, there are certain classical problems that eat away part of this chunk of time.

The Intense Battle at the Market Opening

bulls and bears fightingImage Source

The market opening time at 9:55am is never really for an average trader. The stocks suddenly move in a vertically steep path up or down early at the opening. This should scare the hell out of anyone wanting to trade stocks. During this time, if you check the quote, place an order and then check the quote again, you will see that the price has already changed by 5%! This happens for 15 minutes to even 30 minutes in the morning.

The first 5 minutes is actually a very intense battle between big bulls and big bears. That is between who have buy orders with huge money and those who have sell orders with huge money. I don’t know if these bigger traders actually get a special brokerage account that gives extra privileges to trade the market at the edge than an ordinary stock trader like me.

Early in the morning even before opening, there will be lot of orders from several traders who have placed orders offline the night before or just before the opening of the market. It is like opening a gate, which has on its both sides huge crowd wanting to pass to the other side through the gate. And these orders will be executed only when they match the opposite orders. It is hard to understand how this really works. But we can get a partial sense of it when we think that the more orders that match in a direction, the more quickly the stock moves in that direction.

But even after 5 minutes, the orders don’t just get finished. It is like a rush in the morning. You don’t know if you are going to get caught in a stampede. And moreover, the brokerage services for average traders are horrible during this time. If you place an order, you cannot even know if it is confirmed. I had few occasions of such experience. One time I gave another order thinking the earlier one must have met with an error. After few minutes both orders got executed. That is playing the double edged sword.

The problem here is that you cannot trade without losing the price gap advantage between buy and sell prices.

Another Intense Battle at the Market Close

The similar thing happens near the close. That is the reason why you see intense market activity just 15 minutes before the market close. Actually market suspends trading activity by 3:30pm. The rest of 30 minutes till 4pm is only for the exchanges. Before 3:30pm, the brokers play the game. From 3pm to 3:30pm, they start closing all intraday positions of their clients even without their consent. This is not really a big problem unless you want to trade the last minute fast action. But effectively this half-hour too is lost.

The Realities of the Lunch Hour

And then there is the lunch gap in between. Can you trade stocks from 10am to 4pm without feeding yourself? It is classical problem but nobody really notices it, not the retail investor for sure. I got to know this when I did my first intraday trading at home. I was trading at the edge from the morning. The mistake was that I was trading only one stock. It was my first attempt at intraday trading, so it was okay at that time.

cannot take eyes off the market, lest it will fallImage Source

The stock first moved, in the morning, up and down. It had cut me first and made overall profits on the turn around. But I indulged again too soon after that. It didn’t move in my favor for a long time. Then came the lunch time. I had to be careful not to take my eye off the realtime chart of that stock. As I was at home, I made it easily within 20 minutes. But that also lead me to learn a new thing.

If you had not noticed for a long time, the markets get dull from 11am till 2pm after intense activity till 11am from opening and before intense activity from 2pm till the close. This could have been simply due to the lunch gap. Remember nobody can trade a stock without the counterparty also trading at the same time. For intense activity to take place all participants must be present at that time. There is a big chunk of traders taking break after 11am. Of course not all take the same timing. Hence the distribution is not very uniform during that time but still lesser than the early morning hours.

Any intense activity you can expect now is only on specific counters. This time is really good for the average professional stock trader. The big guys can only trade at the entry and the exit without losing money. But for an average trader all times are good except the first half and last half hours.

What Time is Left for the Trader?

cool trading setupImage Source

For any trader, we can take it for granted that half-an-hour goes for lunch time. Now with this we can see that three half-hours are lost in a typical trading day. That means of the 5.5 hours of active market time, there is only 4 (=5.5 – 3*1.5) hours for which a trader must work like a professional. This is way too lower than an average corporate employee’s work time.

And there are other realities that many people do not see directly. The retail investors or traders hardly close a position on the same day. So they place an order which has the chance of getting executed till the close. But a professional trader increases the chances of his/her orders getting executed in a lot lesser time, and even for more number of orders.

Some times stocks do not move at all for hours altogether. And when they do move they move pretty fast. Anyone analyzing these moves later will find it very discouraging. What if you watched the move for a long time and took a small break in between when the stock broke in either direction? There are very high chances of this happening because it is not random when we are going to choose a break.

We take a break after getting tired for a long time, and the stock breaks out after oscillating in a small price band for a long time. The chances of them coinciding are very high.

Now given that the actual movement of the stock happens within a relatively short period of time, the total 4 hours of trading time in a day are not really appropriate. It actually depends on the number of trades and the skill of the trader to find more and more trading opportunities all through the trading day.

Is There Enough Time to Trade in a Day?

is there enough time to trade in a day?Image Source

This kind of breakup of a trading day is very discouraging atleast for the novice traders and retail, small-scale investors. This takes away their confidence of their orders getting executed. You simply cannot figure out when is the right time to place an order for a particular price. Especially if you are into some kind of strategy than just gambling your way with luck, this particularly holds true as you trade with some rules. Those rules will constrain you more if you bring the time into picture. If you still didn’t get it, it is the stop loss rule.

The best way to handle these kind of problems is to avoid trading stocks! The timing is a really big problem especially during bear markets like the current powerful all-time bear market of 2008-????. In a bull market like the current one (counter trend in bear market), or in a powerful bull market of the 2004-2007s, any order placed at any time will have more chances of returning a favor without being stopped out.

Hence it is good to restrict trading against the trends and go with the trend. If that is not possible stop trading. There are still many better things to do in life. And you don’t need all the time of your life to trade to make big money. I can say that, if you are prepared and experienced, 5 years of powerful bull market is enough for a life time. We had just passed that in 2008 January!

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