Trading the Opening and Closing Market Volatility

How to trade volatile markets at opening and closing? That’s the million dollar question that most traders/investors seek to find answers to. It is because the opening and closing of market hours are the most volatile times in the stock market by far. 

Market opening time is volatile since events that took place overnight impact stock prices during this period, leading to major swings. 

The closing time on the stock exchange is also volatile and risky since institutional investors and day traders close positions and react to late news updates. Intraday positions are squared off, impacting both volatility and liquidity.  

But if you still want some trading strategies for volatile markets, here are a few: 

Strategies for Trading Market Open 

You’ll need a proper volatile market trading strategy at the time of opening. Here are some options worth considering:

Gap-and-Go

When the opening price of any security is some distance away from the previous day’s closing price, it is said to have opened with a gap. This can either be a gap-up (where it opens higher) or a gap-down (where it opens lower). These are signals to generally stay away from market activity since they may show strength in the gap direction or may close with prices shifting opposite to the gap to where it started. 

After identifying potential gaps and confirming how large it is, track the volume. If it is above average, it indicates a likely continuation of the trend. Wait to identify entry and exit points, putting the entry above the high of the first few minutes for a gap-up and the stop-loss below the low of the first few minutes. If it’s a gap-down, then the entry should be below the low of the first few minutes and the stop-loss above the high of the first few minutes. Once the trade is done, monitor it closely, and if it does well, then you can trail the stop-loss and book your profits in case the trend reverses/stalls. 

Breakouts 

This is another strategy for opening hour trading in volatile markets. You have to identify stocks which are just about to breach any vital resistance or support level/trendline or create a breakout pattern. Your assumption will be that the price movement will continue being in the breakout direction, leading to trading opportunities. Breakout and confirmation usually lead to follow-up buying or selling, with a snowballing effect which pushes prices higher/lower and onwards. 

You may use several tools to identify stocks with breakout potential, including moving averages, MACD, RSI, time period, trading volume, and so on. Remember that the quality of the signal matters, and you may initially start with a small position before adding to it later (in case you are risk-averse by nature). Another aspect is recognising false breakouts whenever the stock breaches the resistance/support level but sustains below the level. If you unfortunately get trapped in any such false breakout, wait for a day or two before entering the position (for swing traders). 

Strategies for Trading Market Close 

Here are some of the trade secrets and powerful strategies for volatile markets at closing. 

Volume Surges

Higher volumes usually indicate more sellers and buyers in the market, and they may be higher during the closing since intraday traders may be in a rush to book and close positions. You may look to leverage the volume surge by identifying high-close and high-volume signals, which indicate a trend continuation and strong buying pressure. However, be careful about window dressing or any potential market manipulation to avoid losses. 

To be sure, compare the closing volume to the average daily volume of the stock. Also, a late-day surge is sometimes window dressing where institutions attempt to inflate the closing price artificially. Watch out for stocks with lower liquidity, where sudden spikes in prices at closing may indicate manipulation tactics. Always confirm the trend and consider taking a long position at the opening of the subsequent trading day or after any small pullback, in case it continues. Always set your stop-loss order to guard against a trend reversal and a take-profit order when the price touches a prefixed target. Some volume indicators include PVI, NVI, and more. 

End-Of-Day Reversals 

If you wish to learn how to trade in volatile markets at closing, watch out for end-of-day reversal patterns. Individual stocks may sometimes see sharp return reversals in the final 30 minutes of the day’s session. It is a pattern that is uniquely seen before the market closes and is mostly independent of any intraday momentum. 

You have to keep an eye out for these reversal patterns, including pin bars, engulfing patterns, or other candlestick patterns that signify possible reversal at major resistance/support levels. Once you identify the setup, enter the position at the close of the day. Put a stop-loss below the recent low (bullish setups) or above the recent high (bearish setups), safeguarding against sudden price movements, particularly if you’re holding an overnight position. Use Fibonacci retracement levels or earlier price action to set profit targets or use trailing stops to lock in profits when the trade goes in your favour. 

How to Avoid Getting Caught in Fake Moves

One of the most important trading strategies for volatile markets is to avoid getting caught in fake moves, market manipulation, or other misleading signals. Make sure you determine your entry level and target price beforehand as much as possible and book profits once you reach your target price levels. Use stop-losses to automatically sell shares when prices fall below a particular time limit. 

Make sure you don’t move against the market and exit positions in case of any unfavourable conditions. Rely on a combination of technical tools to identify patterns and trends while watching out for window dressing or market manipulation by institutional investors, as mentioned above. Map resistance and support levels carefully and always close all open positions. Use intraday time analysis strategically as well. 

Real Examples & Case Studies

Pre-Market Session

Traders use the pre-open session to analyse market data and movements, along with company-specific news and announcements for understanding possible opening trends. They may see a major drop in global indices overnight, leading to expect a negative opening for the market. This may lead them to prepare for selling or short-selling specific stocks. 

Now, there may be two scenarios: one, a positive announcement from a company before the market opens, leading to anticipations of a positive opening for the stock. Traders will prepare to buy in this case. Two, there could be a negative news update from the company before the opening, leading to expectations of a negative opening and preparation to sell the same. 

Initial Trading 

The goal will be identifying early patterns/trends within the first few minutes to determine market direction and discover opportunities. If the market opens with an upward trend, a buy trade could be initiated, and if it opens in a downward trend, then a sell trade may be the choice for traders. 

One may also find a stock trading initially at a low price and then see a sudden volume and price surge, indicating a breakout opportunity. It could be a pullback opportunity as well, in case of a stock trading higher initially and then witnessing a sudden drop in price and volumes. 

Closing Trading

Trades that are executed before the closing time may involve market-on-close orders or MOC when you wish to exit the position at the closing price or want to leverage last-minute updates or price movements to initiate new positions or close out existing ones. 

Those with long positions may sell shares just before closing to lock in profits if the price has gone up considerably over the day. Alternatively, they may sell shares to lower losses if the price has fallen significantly. Some may close short positions (sold shares they do not own) by buying back the shares if the price has gone down, thereby making a profit. New trades may also be initiated to last-minute updates and news that may impact the stock price, while some may enter trades based on price breakouts at the close, believing that it will continue into the coming day. 

Case Studies 

• The Paytm IPO, which saw a major price drop on the opening day due to overvaluation 
• Reliance Industries’ buyback in the open market, where it repurchased shares, leading to a major stock price increase and positive investor sentiment riding on the announcement 
• There was an Infosys announcement at 9:18 AM, three minutes after the opening time, and traders could close at the same time. 

Conclusion

Learning how to trade volatile markets is an art and one that gets better with knowledge, experience, and persistence. To succeed, you should have firm strategies for trading opening and closing markets while watching out for fake moves.