Monitoring the trading time of day when extremes (high and low) are made can be helpful when timing entry and exit of a position. Liquidity is king. Large orders from professional traders are likely to be executed when volume is at a peak. The first hour of trade is frequently the highest volume or most liquid time of the trading day. Thus, moves either up or down early in the day give us clues about who is controlling momentum. In uptrends there is a tendency for markets to make the low of the day within 60 minutes of the opening bell. And in downtrends highs are often made within an hour of the open. So, if you carry a long position or own calls, early lows would increase the odds that the market will continue to move in your favor. If you are short or own puts, early highs might be the answer you need to hold the trade and increase profit potential.
The last 30 minutes of the day can be revealing as well. One of the most powerful and common signals traders use as a directional indicator is to refer to the close of the day. If a market closes near the low of the day, chances are it will extend lower in the next session. Conversely, a settle near the daily high tends to lead to higher levels over the next 24 hours.
A subtler signal that reveals momentum is the position of the close in relation to the first hour high and low. If a market closes above the first hour high, it will frequently probe higher the next day. And a close below the first hour low typically means lower prices are likely the following session.
These open and close clues can also signify when a trend is near an end. For example, as an uptrend nears an end you will begin to see early highs and late lows. Conversely, downtrends frequently turn upward when the recent daily lows are made early and the highs late.
Good traders often use short-term price action to gain an advantage. Small clues occasionally tell us when to fold or hold a trade.
Senior Futures Instructor
Market Taker Mentoring, Inc.