If you examine the charts of stocks, you will find that the first hour of trading generally sets the high or low for the entire day.
Below is a 60-minute chart of Apple (AAPL). At the time of this snapshot, for the past 20 days, except for just one day, the high or low for the day was made during the first hour of trading. That’s 95 percent of the time.
As further examples, I examined four other stocks for November and December 2013 and made a note of how often the range for the first hour of trading set either the high or low for the day.
IBM 94.7 percent
BAC 92.1 percent
GLD 86.8 percent
SPY 84.2 percent
As you can see, with a high degree of frequency, the high or low for the entire day was made during the first hour of the trading day. I admit that these odds are rather high. If you examine this frequency over many years, you will find it is closer to about 75 percent of the time.
Commodity ETFs, such as SPDR Gold Trust (GLD) for gold, will often have a lower percentage, as the physical commodities trade on a 24-hour basis. The range of the first hour for stock indexes are often lower than individual stocks, as they represent a broad average, rather than the news or events that may move an individual stock.
Before we can examine how we can use this statistic for trading, I have to add one more important fact about the first hour of the day.
The chart above is another 60-minute chart of Apple. I created an indicator in TradeStation that plots the range of the first hour of the day as compared to the range made for the entire day. Here it is:
(High of first hour — low of first hour)/ (High of Day — Low of Day) X 100.
The result of the calculation is a percent value that the range of the first hour bears to the range for the entire day.
As you can see in the chart, on an average day, the range of the first hour of the day was over 60 percent of the range that would be made for the entire day. There are several observations we can make with this information.
Level of Activity
Many active traders know this already, but most of the action for the day, in any particular stock, also occurs in the first hour of trading, meaning the general tone is set then. The large range that is set in the first hour occurs because those traders who wish to buy or sell the stock generally make their transactions in that time. There can be some continuation of the range later in the day, but most of the time the range of the first hour is over half the price movement for the entire day.
The chart above is a 15-minute chart of IBM. I marked the high and low made during the first 15 minutes of the day. Notice that the range made during these opening moments is normally very large when compared to the ranges made during the rest of the day. This means, as a day trader, you must begin to establish your trade plan early and begin to look for potential trends, which may begin early in the day.
In day trading, all you are looking for is to catch a small piece of the price movement. The research demonstrates that you must act quickly. If you wait too long, you may miss most of the price action and price continuation of the trend.
P.S. Want to learn more about how to recognize a big trend by analyzing charts and daily prices? Starting Feb. 24, I will be hosting a three-part course designed to teach investors just like you about the most common technical indicators found on almost every charting platform. Being able to spot these trends can help reduce losses and gives you the potential to generate higher returns. Click this link today to sign up for this informative course presented by The Weiss Center for Investor Advancement.