Like many other newbie traders, I thought, "the money is in the morning!!". Well, yes and no. If you have a few thousand day trades under your belt, then yes you can make great money in the morning. However, if you are just starting out in the day trading game, you will want to paper trade the morning for an "extended" period of time.
Factors Creating the Volatility
Honestly, this trade was a turning point for me. When I put the trade on, my confidence level was so high. I just knew I was right. Then what happened, DVN rolled on me. I did the right thing today though and that is, after that first sell off, I took the first opportunity to get off the bus on the short squeeze. This allowed me to avoid a much larger loss and get out with my shirt on my back. I am working on a proprietary indicator, and this indicator did not give me a bullish setup. I used this indicator on the rest of my trades on the day , which faired much better.
Overnight and in the morning there are a number of factors which cause the volatility during the morning session. Most Nasdaq stocks release their earnings after the closing bell, and many professional traders will actively trade these issues during the post market session. But, the majority of the public does not feel comfortable or even know how to trade stocks outside of the regular session. So, you will see a flood of public orders reacting to the news in the morning. While the Nasdaq stocks report after the bell, stocks listed on the New York Stock Exchange (NYSE) and American Stock Exchange (AMEX) report before the opening bell. These earnings reports are mostly released between 8 am and 9:15 am. So, again you have traders falling over themselves to react to the earnings report; however, unlike the Nasdaq, which you can trade actively during the pre and post markets, with the NYSE and AMEX, unless you are Goldman Sachs, you will have to wait your turn after the bell rings at 9:30 am.
Thank the folks over at CNBC, Wall Street Journal, and stock analysts for this one. Now, I'm not one of those traders bashing the news syndicates and investment firms, they are simply doing their job. It's how traders respond to this information which generates the moves. This is why I always stay informed of what's in the news, but I do not trade based on the news. Step back and think about it for a second. Does Cramer have any idea of your investment objectives? Has Cramer done a detailed risk analysis of your portfolio? Well, if you are unsure to the answers of these questions, it is NO!!! It really gets under my skin when people say Cramer said the stock would go up, I bought it, and it tanked. Well, this is the stock market, unexpected things happen, the bigger question is, why did you take Cramer's advice on blind faith without doing your own research? How can you buy a stock without knowing the price swings or how the stock trades? Cramer covers anywhere from 25-50 stocks everyday. Even if Cramer is a great trader, at least 30% of these calls will be wrong. While these are great odds, you nor Cramer, have any idea which "pick" is more likely to work out. But, the public loves to react to these "public tips" from television and stock analysts, which is a major contributor to the sharp moves as everyone is reacting to the news.
Everyday there is some news release related to the economy. Unemployment rate, housing market, CPI numbers, etc. These numbers affect the bond market and treasury yields, which in turn affects equities. If you are day trading, it is a must that you know the economic schedule, so you are not blind sided by a 10 am existing home sales report. Visit yahoo finance to see the list of upcoming economic events.
Federal Open Market Committee (FOMC) Meeting
The FOMC meeting is technically part of the economic calendar, but it is such a huge event that it needs to have its own section in this article. The FOMC is responsible for the following monetary policies: open market operations, the discount rate, and reserve requirements. The FOMC holds eight scheduled meetings per year. The FOMC meeting minutes are released three weeks after each scheduled meeting at 2:15 pm. The days leading up to and the morning of the FOMC announcement, you basically have flat markets. So, you will want to cut back on the number of trades you put on prior to the 2:15 pm release, as you will get caught in the chop.
Why Novice Traders should stay away from the Opening Bell
The opening bell will provide great trading opportunities, but it also carries a great deal of risk. Let me provide you with a real-life example. Let's say you noticed the gap on MXIM on 8/17 in the morning. The stock was up over three percent and it appeared that it cleared a significant downtrend. Then the stock backed off of this resistance line, but not by much. So, it looks and feels as though MXIM is going to make a break for it. On the next 15-minute candle, MXIM had an inside bar. But this doesn't concern you as no highs or lows were penetrated. MXIM then produces three more down candles on the 15-minute chart, prior to rolling over filling the gap and dropping a point. This quick reaction to the morning gap would have represented a five percent loss in a matter of three hours. Often times new traders are unable to adjust to quick changes in trends and do not have the experience to know when to get on and off the horse. Remember, the opening bell is not going anywhere. The volatility will always be present, it is part of the game. So, take your time getting use to the setups, it is well worth the wait.