Enter Orders When the Market is Open to Increase Profits!

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Two simple rules can add significantly to annual profits, even for long-term investors.

·        Do not enter orders via your computer when the market is closed.

·        Even wait after the open, until the market has made its initial early morning move.

We advise traders and investors not to place buy or sell orders in the evening when the market is closed because information can change dramatically before the open. That is particularly true now that the world has become so much a global economy, and global markets are open when the U.S. market is closed.

But there’s another reason. Orders placed when the market is closed will often be victims of poor price executions.

Studies show that investors believe that if they get their order in during the evening via their PC, they will be ahead of others in the line at the open the next morning.

However, what happens is buy and sell orders for a given stock or etf placed prior to the open simply accumulate. Then, just prior to the open they are matched by the market-makers at whatever average price will allow them all to be executed, which becomes the opening price.

As long as there is a relatively balanced number of buy and sell orders the opening price will not deviate much from the previous day’s closing price.

But if a piece of news or the market’s action the previous day has investors and traders bullish, buy orders will dominate. There will be fewer sell orders to take the other side of the accumulated orders. So the market-makers will have to move the price up, sometimes significantly, to entice more traders to be willing to sell.

On the other hand, if a piece of news or the previous day’s market action has traders more bearish, sell orders will dominate the pre-open accumulation of orders. Market-makers will then have to move down their list of 'limit-order' buyers (those who have entered limit orders where they will buy only if the price ever moves down to that level), in order to find enough buyers to balance the preponderance of sell orders.

Not only does that distort the price for those who place orders when the market is closed, but that distorted price at the open is often only temporary.

Studies of the market’s movements during a typical trading day show that while the market opens in one direction or the other, that direction often lasts for only an hour or so. The initial move usually reverses direction for awhile in a so-called 'countertrend move', whether or not the direction of the opening move will resume later, whether or not the market will be up or down at the close.

Thus professional traders, when asked after the open what they expect for the market that day, will often say, “I’ll know better when I see what happens around 11 o’clock.”

It is thought the first hour or so of trading is dominated by overnight orders placed by individual investors via their personal computers when the markets are closed, while professional traders take over after the markets have been open awhile.

The theory is that public investors get home from work after the market has closed each day. Only then do many find out how the market closed. If they have an investment decision to make they look through financial publications in the evening, and perhaps surf the Internet looking for more information. Many will then place their order to buy or sell via their PC, even though the market is closed.

Others may postpone their final decision until the next morning, in order to catch the overnight news and the economic reports that are released early the following morning. But then they also tend to enter their orders with their brokerage firm or via their PC before the market opens, so they can get off to work on time, or in the case of retirees, off to their golf game.

As noted, those orders then accumulate until the open, waiting to be matched by the specialists and market-makers, to arrive at the opening price.

Due to the heavy back-up of overnight orders in one direction or the other, the market’s open, and initial move after it opens, is often overdone in one direction or the other. Professional traders therefore tend to wait until that initial move has run its course, then take positions for a quick trade in the opposite direction.

So a market that might have begun the day to the downside will almost always run into a ‘countertrend’ trader’s rally for awhile, even if it resumes its decline later. Markets that open to the upside, almost always run into a brief countertrend pullback of profit-taking, even if it resumes its early rally later.

Don’t take my word for it. It is so consistent that you need only watch the first few hours of trading for a few days to realize how often it happens.

The odds of a counter-trend move taking place after the market has been open for an hour or so is consistent enough that we advise our subscribers to avoid reacting in panic to an opening move if it is opposite to what they need to get a timely price. If they wait an hour or so the market will likely change direction, at least for awhile.

It doesn't happen every day. But it happens so consistently that a trader or investor can often pick up an extra 1/2 to 1% per trade by keeping in mind the probability of a countertrend move after the open. That can add up to a significant amount per year even for long-term investors who make only a few trades per year.

Meanwhile, those placing orders when the market is closed can significantly harm their annual performance by allowing distorted opening prices to chip away at their performance 1/2% or more on a high percentage of their order executions.

While it may seem that the use of limit orders would solve the problem, limit orders introduce other problems, including that if circumstances have changed enough you may not want the trade to go through at any price.

You would just be doing yourself a big favor by placing orders when the market is open, when you have all the latest available information, when you can see how the market is acting, and know exactly what the bid and ask prices are for the holding you want to buy or sell.

Sy Harding publishes the financial website www.StreetSmartReport.com and a free daily Internet blog at www.SyHardingblog.com. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beating the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!