Technology-driven innovations such as algorithmic trading, quants, OTC trading, and many more have made stock market trading considerably more convenient, efficient, and accessible. However, historical trading rhythms, boom and bust cycles, and other trading patterns have stayed eerily unbothered by these for decades.
Stock markets tend to move in synch with sentiment, expectation, fear, or greed. Each trading time has distinct characteristics, such as pre-market, after-hours, or the so-called power hour. Power hours are intense trading periods with the potential for amplified gains or losses. Amateurs usually focus on potential gains, whilst seasoned professionals are more so on possible losses.
The Power Hour in Time Zones
Brief and outsized power hours vary by timezones, and they are not necessarily restricted to an hour or so, more like a segment of the trading day. Volatility is accelerating near the closing and opening hours and amps up on Mondays and Fridays. This is mostly due to pent-up anticipation and demand following and predating weekends’ trading halt. Traders close their positions, including expiring options, en masse on Friday before the weekend, also causing higher volatility. Friday afternoon power hour is the last trading hour of the week, most traders, institutions, and smaller individuals want to liquidate their positions before the weekend. This lets them avoid extended costs and unpredictable Monday morning spikes due to reactions to overnight and morning news since most companies release their news and reports after-hours to protect their assets, having plenty of time to buffer the morning reaction.
Markets are in move 24/7, being open somewhere around the world at any given point, with low trading volume many times. Most traders and institutions are concentrated on a narrow timeframe to move their assets, which presents an enticing opportunity to intensify profits. New traders find it mind-boggling why the stock market is not open 24/7. However, this has a great effect of anticipation on trading volume, indirectly affecting the economy. The possibility to trade whenever would lower the trading volumes significantly, creating an unstable market amplifying risks both collectively and individually.
There are signs to look for pre-market or after-hours that might indicate the direction of assets during the next power hour. One example is the DXY, which reflects the strength of the USD and moves in sync with most stock market movements. There is an amp up of volume starting from mid-afternoon, prior to closing, due to institutions slowly taking positions starting early afternoon, around 2 pm. Traders should strive to go with the flow rather than against it, as institutions can significantly influence prices and direction.
Long-term investors are not concerned about power hours. This phenomenon only affects traders and short-term speculators. However, it might present opportunities for investors to buy stocks at a discounted price, enhancing the profitability of their long-term investment due to volatility. Around news releases and earnings reports for instruments, their power hour trading tends to be bigger. The most powerful power hours happen when FED announcements are made, presenting a peak season for traders.
Big moves create heightened risk. There are two power hours on most trading days, one at the start and one before the close, with the latter being the most volatile in the Eastern US timezone. These are not exact timeframes, but lunchtimes are usually very low in volume on any given trading day, so there are patterns worth following. Closing times inherently become more hectic, as most traders prefer not to hold assets overnight, mitigating risk and lowering costs.