The advantage of timing your trade (not the market)
Author: John Christofilos
April 10, 2018
Market timing is a mug’s game that rarely pays off, but timing your next stock purchase to coincide with the most active periods of the trading day can be a worthwhile strategy.
This is particularly true of the first hour following the market open, as well as the last hour before it closes, when the percentage of total daily volume often spikes, resulting in better liquidity than at other times in the day.
These spikes in trading activity are not unusual and can be anticipated by algorithms that track historical volume data over a time period of 20 or 30 days. If, for example, a certain stock has traded heavily near the close in recent weeks, we would expect that pattern to continue and may adjust our trading in the stock to participate more heavily at that time.
By identifying times in the day when liquidity is greatest, we gain more assurance that our trade will have limited market impact and not materially affect bid/ask spreads. In other words, we’re part of the volume, not the volume, which can sometimes lead to large unintended movements in share prices.
So when is it not an optimal time to trade? We’ll typically reduce our participation during the two hour window between 11am and 1pm, which tends to be a quieter period because that’s when most people get up from their desks and grab lunch. So if we typically trade at 10 to 15% of the average daily volume, we might bring that down to 5% over those two hours and wait to pick it back up when better flow returns later in the afternoon.
John Christofilos is a senior vice president and chief trading officer at AGF Investment Inc. He is a regular contributor to AGF Perspectives.