Factors that Influence Day-to-day Trading

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Factors that Influence Day-to-day Trading

Written by mobby man

Monday, 30 June 2008

Mouse over money There are a number of things that can affect an investor's entry ( buy) into or exit ( sell) out of a given stock and/or sector. Depending on the investor and his or her goals and investing time frame, the importance of timing the entry will differ. Obviously, the shorter the time frame the more important the entry

All investors should be aware of some of the more common market moving influences that can affect a stock's price, so they can make better entries and catch an extra percent or two in return. Let's take a look at eight items that can materially affect the average day's trading.

Overseas Market

The New York Stock Exchange opens for business at 9:30 a.m. EST each day. However, prior to the opening trade on the NYSE, equity markets in Asia and Europe have already (or almost) finished their trading day. The point is, if certain stocks and/or sectors have had a particularly good or bad day in those markets, the sentiment could have an impact on trading here in the U.S.

Economic Data

If there is talk that China may revalue its currency (the yuan), then it may cause shares of exporters to China to trade higher. (The logic behind this is that Chinese companies and individuals will be able to afford more U.S.-made products with a higher yuan.)

In choosing when to invest, you should be aware of any economic news that is or will be coming out around the time you go to enter your position. If a highly anticipated economic release is set to come out that may lead to market volatility, it might be best to wait for its release instead of jumping in beforehand.

Futures Data

Although an individual might be eager to buy or sell stock "at the open" at a favorable price, futures data will give the individual a better idea of whether that will actually be possible. Index futures cover the major market indexes. They start trading before the stock market and are a very good indicator of what the stock market opening will look like. The reason for this is that index futures prices are closely linked with the actual level of the Dow Jones industrial average (DJIA).

In short, investors should check to see if futures contracts are trading higher or lower in pre-market trading. This will give them a better feel for where the index they are tracking might be headed "after the open." You will usually find CNBC or other market outlets talking about the movement of DJIA or S&P 500 futures before they open.

Buying At The Open

Buying or selling stock at the open of the market might not be a good idea. Why?
A lot of buying and/or selling typically occurs within the first hour of the trading day. The opening hour of trading is basically the first time that most market participants have to enter or exit the stock, which can easily produce higher than average trading volume. These market participants are reacting to the myriad news stories that came out between yesterday's close and today's open, which includes major market news events like economic reports and political changes.

Midday Trading Lull

There is typically a drop-off in trading (meaning the volume of transaction) at noon, as most of the major news events are out in the market. During this lull, stock prices can often lose some ground.
When this happens, stocks can be purchased at a cheaper price at 1 p.m. than they could at, say, 11 a.m. Again, this is important to know, as this can affect both entry and exit points.

Analyst Upgrades/Downgrades

An analyst may disseminate an intraday note that can have a significant impact on a given stock and/or sector. As a tip, remember to scan financial Web sites or watch business reports on television. If a large company has just been upgraded or downgraded, try to judge the potential impact on certain industries and the market as a whole.

For example, if a major semiconductor stock was downgraded by a well-known analyst due to slackening demand for that company's products, it might be reasonable to assume that other smaller players may be experiencing similar trends. It might also be logical to assume that shares of computer makers (which purchase large numbers of semiconductors) might be affected as well.

Web-Related Articles

All investors should try to peruse the Web and visit major news portals throughout the day, to see if there are any potentially market-moving news stories in the public domain. Be careful to avoid sites that give recommendations based on the stocks they own. These pump-and-dump schemes are prevalent on the Web.

Friday Trading

Even if you're a buy-and-hold investor, a significant number of retail and institutional traders typically liquidate their equities on Friday (usually in the afternoon), so they don't have to hold their positions and assume risk through the weekend.

What does this mean for you? It means that stocks can and often sell off Friday afternoon during the last few hours of the trading day, if for no other reason than traders are looking to go home "flat" (without positions on their books). Keep this in mind on Fridays if you are trying to find a favorable time to enter or exit a stock position

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