Chasing Entry Points
Something similar to the following has probably happened to you at some point: you want to buy a stock on a certain day and in order to time your entry, you start watching how it trades. Alas, the price rises and rises, and your patience begins to wear thin. Shouldn’t a correction set in soon and provide you with a more favorable buying opportunity?
Apple-Spotting – a five minute intraday chart showing the action in AAPL on February 1, 2017 – an example that illustrated the general principle discussed here quite well. We could of course have picked another stock or an index future, but AAPL was convenient on account of the earnings beat it announced on the preceding evening, which triggered relentless buying pressure over most of the trading day [PT] – click to enlarge.
But nothing of the sort happens; instead the price just keeps rising relentlessly. You become increasingly restless. Finally, your patience is running out and you buy the stock at a significantly higher price than was available earlier in the trading session.
Shortly after your order has been executed, the price begins to fall… and to your chagrin, it keeps falling.
Statistics Can Help You
How can one minimize the probability of paying an unfavorable entry price, while at the same time avoiding the time-consuming and nerve-wracking exercise described above? We will take a look at the possibility of optimizing the timing of entries and exits with the aid of statistics.
The chart below shows the average intraday price pattern of the S&P 500 Index over the past six months. The horizontal scale indicates the time of the day (EST), the vertical scale the average price level.
S&P 500 Index, average intraday pattern, 7/2016 – 1/2017. On average, the best time to purchase stocks was at 2:00 pm EST. Source: Seasonax
As you can see, the best time to buy stocks over the past six months was two hours before the close of trading, at 2:00 pm EST. Those who made purchases at this time of the day did so at somewhat better average prices and were thus able to improve their performance – in the long run, such an edge will tend to add up and make quite a big difference. Moreover, it saves time and is less stressful, as one will be able to make decisions on the timing of trades more quickly.
How reliable is this approach though?
Intraday Patterns Are Often Stable Over Many Years
A number of statistical studies are underpinning the stability of intraday patterns. For instance, the Zerohedge blog published a post entitled “How to Beat Every Hedge Fund in Just 2 Trades and 4 Hours a Day”, in which it presented the result of an intraday study performed by market research company Nanex. The study encompasses a time period of more than ten years and refers to the S&P 500 futures contract, which trades around the clock.
The result is startling: depending on the time of the day, returns can vary a great deal. Anyone who entered into a long position exclusively in the four hours between 12:00 am and 4:00 am was able to beat the market by a significant margin on a risk-adjusted basis.
Even if one is not a day trader, one can still optimize one’s entry and exit timing with the help of statistics and thereby obtain a notable edge – all those pennies saved will quickly add up.
Charts by: StockCharts, Seasonax
Chart 1 caption by PT
Dimitri Speck is the founder of Seaonax and Head Analyst of 90 Tage Trader (a German newsletter for seasonal traders). He is a well-known financial analyst and book author and the former manager of Stay-C, one of the most successful commodity funds ever listed in Germany.
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