Every good investor knows that in order to make money on any investment, you must first understand all aspects of it, so let's look at why most trading volume is concentrated at the beginning and end of the day.

IN PICTURES: Learn To Invest In 10 Steps

If you have ever came home from work and used your evening hours to research stocks and place trade orders for the next day, you and others like you are the reason for the first hour high volume. As soon as the stock market opens, a rush of programmed trades enters the market and is quickly filled.

Along with the trades executed for retail investors, much of the volume comes from mutual funds, hedge funds and other high volume traders. Another source is day traders who have to set their positions for the day during the first hour. All of these factors added together represent a large amount of volume in a short amount of time.

But what about the afternoon?

A common rule among day traders is to always end their day without any stock positions, so they must sell their positions at the end of the day. Additionally, retail investors, trying to avoid day trading rules may purchase stock at the end of the day so they are free to sell it the next day if they wish. Some institutions often do not wish to hold large positions over long weekends or holidays when they have no means of liquidating should a big news event take place somewhere in the world.

So how can you profit from this phenomenon or at least avoid loss?

Volume Research
When you research a stock, look at the amount of volatility in the first and last hours of trading. If it tends to be very volatile during those hours, you may be able to buy or sell at a price which is much higher or lower than its fundamental value. Set your limit orders unusually high or low to see if you can catch a great bargain in the early minutes of trading.

IN PICTURES: 5 "New" Rules For Safe Investing

Use Limit Orders
You can safely trade during the first and last hours of the trading day if you stay disciplined, and the best way to do this is to use limit orders. A limit order allows you to set the maximum buy or sell price instead of buying or selling at the price the market will pay. If you own stock XYZ and don't want to sell for less than $34.00 per share, place a sell order with your broker and set your limit price at $34.00. The same strategy can be used when you buy a certain stock. (For more on limit orders, see Protect Yourself From Market Loss)

Trade Today for Tomorrow
Retail investors cannot buy and sell a stock on the same day any more than three times in a five business day period. This is known as the pattern day trader rule. Investors can avoid this rule by buying at the end of the day and selling the next day. Using this method, a person could hold a stock for less than 24 hours while avoiding day trading rules. Be aware that trading strategies of a short term nature come with a lot of risk, so careful research and risk management is imperative.

Gap Trading
You purchased stock YZX for $30 today but you expect the stock to rise to $35 after they announce quarterly earnings after the close of the market today. This means that when the market opens tomorrow, YZX will open at $35 if you're correct. This creates a $5 gap in the chart which represents a $5 per share profit for you. (If you would like to know more about gap trading, read Playing The Gap.)

Bottom Line
Whether or not you avoid these hours altogether or aim to confine your trading to these hours largely depends on your risk appetite and experience with the market. If you're a new or inexperienced investor, it is best to move carefully during these times.

For the latest financial news, see Water Cooler Finance: Poverty Rates Increase – And So Do Millionaires.

Related Articles
  1. Charts & Patterns

    How To Use Volume To Improve Your Trading

    The basic guidelines to analyzing volume may not apply in all situations, but overall, they can help direct entry and exit decisions.
  2. Trading Strategies

    4 Common Active Trading Strategies

    Active trading entails buying and selling securities with the intent of profiting from short-term price movements.
  3. Term

    Swing Trading Risks and Rewards

    Swing trading is the attempt to capture gains in a stock within one to four days.
  4. Technical Indicators

    Basics Of Algorithmic Trading

    Algorithmic trading is the process of using computers for placing trades in order to generate profits at a speed and frequency that are beyond a person’s capability.
  5. Investing Basics

    How To Choose The Right Online Trading Broker

    The online broker market is becoming more competitive, but differences exist in services that can help traders choose the broker that’s right for them.
  6. Active Trading Fundamentals

    The Risks and Rewards of Day Trading the UWTI (UWTI)

    Learn about the VelocityShares 3x Long Crude ETN, as well as its issuing company VelocityShares, and the potential risks and rewards of the ETN.
  7. Trading Systems & Software

    The Perfect Moving Averages For Day Trading (AAPL)

    5-, 8- and 13-bar simple moving averages offer perfect inputs for day traders seeking quick profits on the long and short sides.
  8. Fundamental Analysis

    3 Ways to Play Gold at $1000 (GLD, GDX)

    Gold ended 2015 within 100-points of 1000 and could bounce at that psychological level in 2016.
  9. Professionals

    Quit Your Job To Trade Stocks?

    Ready to quit your day job and become a full-time trader? These tips will help you determine your area of expertise.
  10. Investing Basics

    What It Takes To Become An Elite Trader

    A select few investors defy the odds and churn out profits over long periods of time, building the kind of wealth others only dream about.
RELATED FAQS
  1. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  2. How reliable is the Fibonacci retracement in predicting stock behavior?

    The use of the Fibonacci retracement is subjective. There is no objective method to verify one application of the Fibonacci ... Read Full Answer >>
  3. How can a swing trader use a Fibonacci retracement?

    Swing traders can use the Fibonacci retracement to determine levels of support and resistance for a price on a chart, as ... Read Full Answer >>
  4. How does a swing trader use the stochastic oscillator?

    The stochastic oscillator is a momentum technical indicator used to indicate points of possible price reversals. Swing traders ... Read Full Answer >>
  5. How can I apply sensitivity analysis to my investment decisions?

    When a stock doesn't reach a lower swing, create a trading strategy by using the previous swing low as a pivot point. If ... Read Full Answer >>
  6. How should a risk-averse investor build a retirement portfolio?

    One trading strategy to use when a stock's price fails to reach a higher high would be to short the stock while setting a ... Read Full Answer >>
Hot Definitions
  1. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  2. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  3. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  4. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  5. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  6. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
Trading Center