Friday, December 14, 2007

Daytraders' Challenge: Stock Market Performance by Time of Day

Many times short-term traders struggle because they don't realize how their market is trading at the times of day in which they are active.

Here we see the Dow Jones Industrial Average for 2007 broken down by time of day performance. The blue line represents the cumulative performance of the first hour of trading; the pink line is the performance for the middle hours (end of first hour to beginning of the last hour); and the yellow line is the performance for the final hour of trading.

What we can see is that these seem to be different markets. Indeed, the daily correlations among the three range from .12 to .18, suggesting that what the market does during one time period is only very weakly related to what it will do in the next one.

Moreover, we can see that essentially all of the market's upward trend has taken place during the first hour of trading. The first hour has accounted for about 1116 points of gain during 2007; the middle hours have lost about 780 points; and the last hour has gained about 719 points. What that means is that daytraders who sit out the first hour of trading have not, as a whole, benefited from the upward market trend. Indeed, there has been something of a downward trend to the market's middle hours.

We can see that, during the market's recent weakness, there has been relatively little selling in the last hour. Much of the market's bounce from November lows has occurred during the first hour--and most likely during overnight action in response to strength in Asia and Europe. Too often, short-term traders look at a daily chart and try to go with a trend, not realizing that the trend may not pertain to the hours of day in which they're trading.


Stock Market Performance by Hour of Day


Brandon Wilhite said...

Another excellent observation. Really any seasoned trader should be aware of these things. Currency traders may be even more aware of them, due to the 24/5 nature of those markets. I wonder how much the US equities markets are becoming more like currency markets in this regard. Your research on gaps from awhile back might be a good example. You found that with a strong enough gap, that continuance was more likely than reversal. But what is a gap on the daily chart could be a strong overnight trend (intraday). I wonder just how much the landscape will change for US equities traders, and I also wonder if there are edges to be found in the overnight sessions. Just some musings.


elegy said...

IMO an equally important observation is the "smile" chart showing volume by hour of the day. Could you post that one for 2007 and comment on it?

[i.e. total volume in 2007 for each hour (or 15-min period) of day.] said...

What a great post and detailed analysis. Understanding trends intra day is crucial when attempting to trade with the trend and make the most out of floor hours.

Happy holidays to everyone,

Lindsay at the TradersBlog

Jim Cole said...

I'm a day trader who has noticed something along these lines; it's nice to see some empirical analysis of this. What I've noticed is that on many days, the S&P 500 stays in either an upward or downward trend for the first 2-3 hours of trading. There are virtually always retracements, and the 2-3 hour trend rule isn't enough to trade on alone, but I would be very interested in seeing how your data came out if you changed the definition of the time periods to the first 2 hours, the next 3-1/2 hours, and the last hour.


Dave said...

Great post and points, Brett. Much of the refinement of my trading strategy comes from the time of day reports at StockTickr.

I get the opportunity to review trading results from lots of traders and there is almost always something to learn from the time of day performance reports no matter what their trading style.

Brett Steenbarger, Ph.D. said...

Hi Brandon,

Great points. Much of that overnight action is a reflection of what's happening in Asia and Europe. In terms of globalization, stock trading is indeed more and more like currency trading.


Brett Steenbarger, Ph.D. said...

Hi Elegy,

I actually keep a running 20 day average of volume as a function of time of day, because that shifts within the course of a year. It's a nice gauge of degree of institutional participation. I'll be happy to repost in the near future; thanks.


Brett Steenbarger, Ph.D. said...

Hi Jim,

Yes, I have conducted analyses of price action as a function of the specific hour of the day and that is also informative. Much of the market's trending behavior occurs during the early and late phases of the day when volume tends to be greatest.


Brett Steenbarger, Ph.D. said...

Hi Dave,

Great point. I like how StockTickr enables traders to track results as a function of time of day. The data are often enlightening for daytraders.


Lugo said...

Hi Dr. Brett.

Could you post more information about price patterns through trading hours?

As I'm a "half-time-after-hours" trader living in Europe, I noticed that trading the last hour of US-markets will be enough to my trading profit targets.