Timing your trading entries
I don’t know about you, but for me, it seems like it is practically a law that as soon as I enter a trade, it goes down! It’s as if some trading god is watching as I hit the submit button to enter a trade, waiting for me to enter so the stock can start dropping!
Within seconds…certainly minutes later, the stock moves several ticks downward.
Does this happen to you? Is it some type of universal law?
As long as I have been trading, this rule is something that I have not been able to completely buck. Now, am I NOT talking major drops here. Also, my trading has a positive overall expectancy. Bottom line: my trading makes money….but it sure would be nice if I could time my entries a bit better, so it is an area that I always focus to improve.
I’ve gotten better over the years. I’ve learned to be a bit more patient, where I almost stalk a trade, watching for a more ideal entry point.
That got me thinking about putting this post together for you to outline a few tips that I found have worked for me, along with wondering about the general market…when is the best time to buy (and sell)?
It inspired me to put in a little research into the overall statistics of ideal points to buy (and sell)…so here we go.
What is the best day of the week to buy?
If you were to pick one day of the week to buy a stock, which would be the best single day? Tuesday? Friday? Monday?
First of all, if the market were truly random, each day of the week would have the same level of variability in returns. Turns out that’s not the case. Check out the conclusion from this research paper:
I highlighted a few key points.
There are definitely patterns that on average, play out on a weekly basis. The markets are not efficient. There are better days to buy and better days to sell….on average!
What is the single best day of the week to buy then?
Turns out it is Monday. Take a look at the chart below from an Investopedia article that shows over 100 years, Mondays are the single best day to buy, since the daily return is the lowest of the 5.
I do remember though, that in the extreme bull market of 1999, huge surges on Mondays, as pent-up FOMO (fear of missing out) took place and huge gaps up occurred on Mondays, so I’m sure this isn’t always the case during certain timeframes and across different financial assets.
I haven’t been able to find anything on day of the week statistics of that period, but that’s just what I remember.
You can also see that overall, Friday’s are the best single day to sell!
Why the heck is this the case? At this point, things start to get a bit more subjective and less concrete, but some of the possible reasons are:
- Companies release bad news on Fridays or over the weekend, after the market’s have closed.
- Everyone has to go back to work on Monday’s. The overall mood is therefore more downbeat and depressed.
- Others think short sellers are more active entering their positions on Monday’s, which can tend to drive prices even lower.
What is the best month to buy (and sell)?
I always thought October was the worst performing month. I remember the crash in October 1987. In October 1997 there was a global currency crisis and the market had a mini panic crash. Remember October 2008? Yikes! That was a horrible month.
The great crash of 1929 also occurred in October.
Turns out that it’s not October. It’s September!
In the chart above of the S&P 500, since 1929 until 2012, September had the worst performance with an average return of a negative 1.1%. December looked to be the best month to sell with a positive 1.5%.
Also, notice the ranges! The swings (volatility) that September has compared to months like December is amazing.
And this “seasonality effect” doesn’t just exist within the U.S. stock market.
There is an amazing research paper called Are Monthly Seasonals Real? A Three Century Perspective , where the authors compile data going back to 1693 across over 100 countries!
They found that the best months of the year to sell are worst performing (best times to buy) were May and September, and the best performing (best times to sell) were April and December.
Maybe you’ve heard of these quotes:
- Sell in May and Go Away = Tough market between May and October
- The Halloween Effect = Market performs well in November
- The Santa Claus Rally = December is a great month that has a rally
- The January Effect = Small cap stocks do well in January
For instance…here they note that the returns in the U.S. and British stock market didn’t show the January effect becoming strong until after Christmas became a national holiday!
These returns are driven by fundamental effects such as tax laws (change in rates, yearly tax filing periods), national holidays, and probably also psychological effects of human emotions and moods of optimism and depression.
What is the best time of day to buy (and sell)?
I used to research stocks after the market closed and would sometimes find amazing stocks that I thought would be great to buy. I couldn’t wait for the market to open, and then would just FOMO (fear of missing out) right into a trade, at the market open and buy my precious stock!
What a dumb mistake.
I kept making that same mistake again and again. Amazingly, I still did this when I noticed that the jump in prices from 9:30 AM (when the U.S. market opens) to 10 AM would generally be the high of the day and the stocks would just fade lower for the remainder. I had no discipline, and kept doing this even though I knew it was probably the wrong thing to do because “maybe this time would be different”. This stock was a gem of a trade. Wrong.
So what are the best overall times of the day to buy and sell?
It is commonly known that the “dumb money” does what I described, jumping right in at the market open with buys, typically on old news. In many cases, the “smart money” will fade those moves down during the rest of the day.
That being said, the first hour of trading is typically the best time to buy AND sell, if you know what you are doing and have a plan or method that works! That first hour of trading is typically the most active, with all sorts of participants trading in the market.
The same can be said for the last hour of trading, especially the last half-hour (starting at 3:30 PM in the U.S. market), where sharp rallies and declines occur as traders buy in anticipation of the next day or close out positions to avoid overnight holds.
The middle of the day is when volume tends to dry up and the pricing action meanders along.
For me, I no longer chase a stock I know I want to get into right at the open for fear that it will open and just continue higher, way above where I wanted to enter.
Yes, it’s hard.
And it takes discipline!
Now, I wait and watch the stock at the open, look at how it is behaving to get a feel for it and then more often than not, it dips below the open.
At some point, I’ll make the buy, but never right at the open anymore!
Using multiple timeframes to figure out best time to buy
No matter what your trading timeframe (holding period): minutes, hours, days, weeks…it is a good idea to look at charts in one timeframe above and one timeframe below the timeframe that you trade in.
For example…as you all probably know, I’m a swing trade holding stocks for a day to about 2 weeks, buying stocks that have been trending upwards, have had a recent dip and are at support, with the chance that the stock will recover from the dip and resume its upward trend.
- So I look at the daily charts for my potential setups.
- When I find a promising looking trade on the daily chart, I first take a look at the weekly. Is that long-term overall trend up? If not, I’m not trading it.
- Then I move one timeframe down to the hourly, does this chart reaching an area of support that could provide a good entry?
The influential trading author, Alexander Elder, popularized the method of looking above and below the intermediate timeframe that you are trading in. He calls it his Triple Screen Trading System. In his book, Trading for a Living, he outlines this method in IX, page 235. Here is an excerpt:
Each trader needs to decide which timeframe he wants to trade. Triple Screen calls that the intermediate timeframe. The long-term timeframe is one order of magnitude longer. The short-term timeframe is one order of magnitude shorter.
For example, if you want to carry a trade for several days or weeks, then your intermediate timeframe will be defined by the daily charts. Weekly charts are one order of magnitude longer, and they determine the long-term timeframe. Hourly charts are one order of magnitude shorter, and they determine the short-term timeframe.
While I don’t use the exact method he then goes on to describe, this concept is huge!
The overall theme here is, first of all, what is the overall direction of the trend? If you are hoping for an upswing, make sure you are not fighting the tide and trading in the direction of the overall trend.
Then, by moving one timeframe below, make sure you are not entering a trade when the short-term trend isn’t in your favor either.
Wait for a sign that the hourly is about to move in your direction, or the hourly is in a nice uptrend, and then you can feel more confident that you are at a solid entry point.
So for me, here would be an example with a stock that I might enter today (8/17/18)…as I am typing this very early in the morning on before the market opens. I’ll probably publish this on Saturday when I finish up this post.
Here is the longer term weekly timeframe (“one magnitude higher”, as Dr. Elder says).
Notice how we are safely in a uptrend here. This is a 2 year, weekly chart of DSE.
Notice how it was in a pretty decent downtrend for pretty much all of 2017.
Then in December, it broke through the upper downtrend resistance line and pulled back to the top of the resistance line, where it found support in April.
Then it moved higher, creating the upward channel that DSE has been in for months.
This is a classic break of a downtrend. So we can conclude by looking at the longer term timeframe that…
- Downtrend break = confirmed
- Longer term uptrend = confirmed
Now DSE has been in a steady uptrend on the weekly chart. So the weekly chart looks good to me here.
Now let’s look at the daily chart…the timeframe I trade in:
Here you can see that the stock has pulled back to what I would consider a support line.
I also highlighted the areas of prior resistance (which become support when the price is above the old resistance) with the circles.
Notice how we have nice lower wicks on the larger red candlestick at support, where it dipped below the support line and buyers stepped in.
It’s confirmed again by the most recent up day, which also has the nice lower shadow, just touching support. I closely watch for bullish candlesticks on my trades…we have one here that occurred on 8/16/18 on the daily chart.
This area of support WAS NOT visible on the weekly chart, was it? That’s the whole point of using multiple timeframes to decide the timing of your buy!
That is really the main point that Dr. Elder was making in his book, make sure you are looking at multiple timeframes to ensure you are seeing the entire picture!
Ok, what about the hourly chart for DSE so we can now confirm if this is a good time to buy or wait?
In my mind, you can see here how we reached a bottom, and now are in a confirmed uptrend on the hourly.
One would hope that this trend would continue.
We can feel a bit more confident making an entry point here because we know the following:
- On the weekly chart, we know we are in a confirmed uptrend
- On the daily chart, we know we are at a pullback to a support area
- On the hourly chart, we know that we have seen a turning, pivot point and are now in a bit of a uptrend
So, looking at this hourly chart, I would anticipate this uptrend to continue the next day. I would be looking to get in on a slight dip in the morning today (Friday, 8/17/18).
With this typical trade setup/pattern of mine, you can see how it is important to take a look at the timeframes and make sure you see the bigger picture, but also drill down to see what is happening under the surface.
I would bet that most traders don’t do this.
I know I didn’t, and would sometimes be perplexed when a trade that looked perfect to me on the daily chart, didn’t go my way. Many times it was because I was fighting the overall larger trend. Other times the long-term trend was in my favor, but the hourly chart showed that the stock had a little bit more to drop and it would be better to wait for an uptick on the hourly. I just wasn’t carefully timing my entry points!
This method isn’t foolproof, but has really helped me with my trading accuracy.
So in conclusion…does it seem like stocks still go down as soon as I enter?
Yes, I still could say that. Most of the time, they might tick lower a little bit, but I would say by timing my entries and understanding the multiple timeframes, my accuracy has improved. I still think some type of god is watching as soon as I click that buy button and hold my breath before the downward ticks start, but hey, that’s just me.
After I make my entry, I got other things to do in life, so I set my stop to protect myself and set my ideal profit exit and go about my day. If either one hits, profit or loss…I know I did my analysis up front and followed my plan.
How about you guys…any tips you use to time your trading entries?
Have a good one and talk to you very soon,
My Top 5 Free Trading Tools
Access a list of the Top 5 tools that I use every day to find and analyze the best swing trading opportunities.
P.S. – I just added an extra resource that turned my trading career around.