The purpose of investing is to make money. But it can be a risky business that comes with both wins and losses. Almost every investor knows that you need to understand how things work if you want to make money. So if you’re investing in a stock, you need to come to the table prepared with knowledge about the company, earningsgrowth potential, risk factors and market among others.
You also need to find an appropriate solution commercial strategy that meets your investment needs and objectives. This article examines a plan that takes advantage of the increased activity in the first and last hours of the trading day, commonly referred to as the two-hour-a-day trading plan.
Key points to remember
- The two-hour-a-day trading plan involves executing trades during the first and last hours of the trading day.
- The volume tends to jump during these two hours of the day.
- Setting limit orders allows you to take advantage of fluctuations during these key trading hours.
- You can avoid the day trader’s rule by buying stocks today and selling them tomorrow.
- Gap Trading helps savvy traders identify stocks that will open or close at a price that will earn them a profit.
What is the two-hour-a-day trading plan?
If you work 9 to 5 and use your evening hours to research stocks and place trade orders for the next day, you (and others like you) are the reason for the first hour of high volume. As early as the stock Exchange opens, a rush of scheduled trades enter the market and are quickly filled.
With transactions executed for retail investorsa large portion of the volume comes from mutual funds, hedge funds, and other high volume traders. Day traders also set their positions for the day during the first hour. All of these factors added together add up to a large amount of volume in a short period of time.
A common rule among day traders is to always end their day without any market positions, so they must sell their positions at the end of the day. Retail investors who want to avoid transactions of the day can buy shares at the end of the day, so they are free to sell them the next day if they wish. Some institutions are often unwilling to hold important positions over long weekends or vacations when they have no means of liquidateespecially when a big event takes place.
So how can you take advantage of this phenomenon or at least minimize the risk of a loss? Here are some ways to set yourself apart.
Trading volume is a metric that many traders monitor, so it is important that you understand what it is and how it works.
Volume measures the degree to which an asset is traded over a given period of time. Inventory volume tells you how much actions are negotiated within a specified period. As such, it can give you insight into the mood of the market. For example, a heavily traded stock usually indicates a strong market and growing investor interest. And if there isn’t a lot of volume, chances are there isn’t much interest in the business.
When looking for a stock, look at the amount of volatility in the first and last hours of trading. If it tends to be very volatile during these hours, you may be able to buy or sell above or below its fundamental value. Set your limit orders unusually high or low to see if you can get a good deal within the first few minutes of trading.
A stock’s price and trading volume must work in conjunction. If they don’t, it may indicate that the trend is weakening and may reverse course.
Use limit orders
We mentioned limit orders in the previous section. You can trade safely during the early and late hours of the trading day if you remain disciplined, and the best way to do this is to use limit orders. But, what are they exactly?
Limit orders allow you to buy or sell stocks at a certain price or at an even better price. Buy limit orders are only executed at the limit or lower price and the reverse is true for sell limit orders. That is, they are executed at the set limit or at a higher price.
Still confused? Here is a hypothetical example to show how they work. Say you own shares of XYZ Company and you don’t want to sell them at less than $34.00 per share. You can place a sell order with your broker and set your limit price at $34.00. This way you are guaranteed to sell your stock at your limit price or better if it reaches it. The same strategy can be used when buying a certain stock.
Limit orders are not guaranteed to be filled.
Trade today for tomorrow
Traders who buy and sell a stock on the same day more than four times in a period of five working days in a margin account (which uses capital borrowed from the broker) are called model day traders (PDT). This is a strategy intended only for people who are familiar with trading and the markets. These traders use speculation to transact in a single day, allowing them to close all their positions by the end of the day.
In order to trade using the day trader pattern rule, you must be classified as such with your brokerage firm. This means retail investors are not allowed to use day trading strategies. But there may be instances where you think you could benefit from multiple trades during the day, so how do you get around that?
Investors can circumvent this rule by buying at the end of the day and selling the next day. A trader could hold a stock for less than 24 hours while avoiding transactions of the day rules using this method. Be aware that in the short term business strategies often carry a lot of risk, so it is important to consider careful research and risk management.
Another way to take advantage of the two-hour-a-day plan is to employ a spread trade strategy. A gap represents an area of a stock chart where the price rises or falls sharply. There is usually very little, if any, commercial activity taking place. You can take advantage and take advantage of all the shortcomings if you understand them.
Here is an example. Let’s say you bought shares of ABC Company for $30 today and the company announces its quarterly results after the market closes. Suppose you think the stock will rise to $35 after the announcement, which means that when the market opens the next day, the company’s stock will start trading at $35. If you are correct, this creates a gap of $5 in the chart, which represents a profit for you of $5 per share.
What is the two-hour-a-day trading plan?
The two-hour-a-day trading plan involves trading during some of the busiest hours of the trading day. As such, the plan normally refers to the first and last hours of the business day.
How often can you buy and sell the same stock?
As a retail investor, you cannot buy and sell the same stock more than four times in a five business day period. Anyone who exceeds this limit violates the pattern day trader rule, which is reserved for people classified by their brokers as day traders and may be barred from trading.
What are investors who buy and sell stocks on the same day?
Investors who buy and sell stocks on the same day are called day traders or model day traders. These people close their positions at the end of the day.
What happens if you sell and buy shares on the same day?
If you’ve already registered to be a day trader, you’re set. But if you are not, your account could be flagged and your account could be restricted. Ask your broker about the rules for executing multiple trades for the same security in a single day.
Whether or not you avoid these hours or aim to limit your trading to these hours largely depends on your risk appetite and market experience. Whether you are a new or inexperienced investor, be sure to proceed with caution during these times. If you don’t, you may end up with higher losses at the end of the day.
Disclaimer: Curated and re-published here. We do not claim anything as we translated and re-published using Google translator. All ideas and images shared only for information purpose only. Ideas and information collected through Google re-written in accordance with guidelines and published. We strictly follow Google Webmaster guidelines. You can reach us @ firstname.lastname@example.org. We resolve the issues within hour to keep the work on top priority.