Unlike traditional investing, trading has a short-term focus. The trader buys a stock not to hold for gradual appreciation, but for a quick turnaround, often within a pre-determined time period: a few days, a week, month or quarter. And of course, day trading, as the name implies, has the shortest time frame of all. Analysis may be broken down to days, hours and even minutes, and the time of day in which a trade is made can be an important factor to consider.
Is there a best day of the week to buy stocks? Or a best day to sell stock? Does a best time of year to buy stocks exist? How about a best month to buy stocks, or to unload them? In this article, we'll show you how to time trading decisions according to daily, weekly and monthly trends.
Best Times of Day to Buy Stocks (or Sell Them)
First thing in the morning, market volumes and prices can go wild. The opening hours represent the window in which the market factors in all of the news releases since the previous closing bell, which contributes to price volatility. A skilled trader may be able to recognize the appropriate patterns and make a quick profit, but a less skilled trader could suffer serious losses as a result. So if you're a novice, you may want to avoid trading during these volatile hours – or at least, within the first hour.
However, for seasoned day traders, that first 15 minutes following the opening bell is prime time, usually offering some of the biggest trades of the day on the initial trends. The whole 9:30-10:30 AM ET period is often one of the best hours of the day for day trading, offering the biggest moves in the shortest amount of time – an efficient combination. Extend it out to 11:30 AM if you want another hour of trading. A lot of professional day traders stop trading around then, as that is when volatility and volume tend to taper off. Once that happens, trades take longer and moves are smaller with less volume.
If day trading index futures such as S&P 500 E-Minis, or an actively traded index ETF such as the S&P 500 SPDR, you can be begin trading as early as 8:30 AM (pre-market) and then begin tapering off around 10:30 AM. As with stocks, trading can continue up to 11:30 AM, but only if the market is still providing opportunities.
The middle of the day tends to be the most calm and stable period of most trading days. No, it's not that traders are on lunch break. It's that this is the time of day when people are waiting for further news to be announced. Because most of the day's news releases have already been factored into stock prices, many are watching to see where the market may be heading for the remainder of the day. Because prices are relatively stable during this period, it's a good time for a beginner to place trades, as the action is slower and the returns might be more predictable.
In the last hours of the trading day, volatility and volume increase again. In fact, common intra-day stock market patterns show the last hour can be like the first: sharp reversals and big moves, especially in the last several minutes of trading. From 3:00 to 4:00 PM, day traders are often trying to close out their positions, or they may be attempting to join a late-day rally in the hope that the momentum will carry forward into the next trading day.
Best Day of the Week to Buy Stock: Monday
There are some who believe that certain days offer systematically better returns than others, but over the long run, there is very little evidence for such a market-wide effect. Still, people believe that the first day of the work week is best. It's called the Monday Effect. For decades, the stock market has had a tendency to drop on Mondays, on average. Some studies have attributed this to a significant amount of bad news that is often released over the weekend. Others point to investors' gloomy mood at having to go back to work, which is especially evident during the early hours of Monday trading. Since the Monday Effect has been made public and information has diffused through the market about it, the impact has largely disappeared. The chart below shows that while Mondays on average have marked negative returns for the S&P 500 in 2018, the effect is very small.
Nevertheless, if you're planning on buying stocks, perhaps you're better off doing it on a Monday than any other day of the week, and potentially snapping up some bargains in the process.
Best Day of the Week to Sell Stock: Friday
If Monday may be the best day of the week to buy stocks, it follows that Friday is probably the best day to sell stock – before prices dip on Monday. If you're interested in short selling, then Friday may be the best day to take a short position (because stocks tend to be priced higher on a Friday), and Monday would be the best day to cover your short. In the U.S., Fridays that are on the eve of three-day weekends tend to be especially good. Due to generally positive feelings prior to a long holiday weekend, the stock markets tend to rise ahead of these observed holidays.
Best Time of Year to Buy Stocks
What is the Best Month to Buy Stocks?
The markets tend to have strong returns around the turn of the year as well as during the summer months, while September is traditionally a down month. The average return in October is positive historically, despite the record drops of 19.7% and 21.5% in 1929 and 1987. The chart below shows the monthly average returns for the S&P 500 over the period 1928 through 2017:
So, a trader may consider getting into the equity market in a big way in September, when prices tend to fall, to be ready for the October bump-up.
There's also something called the January Effect. At the beginning of the New Year, investors return to equity markets with a vengeance, pushing up prices – especially of small cap and value stocks, according to "Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-Term Investment Strategies" by Jeremy J. Siegel. But again, as information about such potential anomalies make their way through the market, the effects tend to disappear.
So, in terms of seasonality, the end of December has shown to be a good time to buy small caps or value stocks, to be poised for the rise early in the next month. There's another advantage: many investors start to sell stocks en masse at year's end, especially those that have declined in value, in order to claim capital losses on their tax returns. So again, the last trading days of the year can offer some bargains.
The Best Day of the Month to Invest
There is no one single day of every month that's always ideal for buying or selling. However, there is a tendency for stocks to rise at the turn of a month. This tendency is mostly related to periodic new money flows directed toward mutual funds at the beginning of every month. In addition, fund managers attempt to make their balance sheets look pretty at the end of each quarter by buying stocks that have done well during that particular quarter. Stock prices tend to fall in the middle of the month.
So, a trader might benefit by timing stock buys near a month's midpoint – the 10th to the 15th, for example. The best day to sell stocks would probably be within the five days around the turn of the month.
The Bottom Line
These suggestions as to the best time of day to trade stocks, the best day of week to buy or sell stocks, and the best month to buy or sell stocks are generalizations, of course. Exceptions and anomalies abound, depending on news events and changing market conditions. The closest thing to a hard and fast rule is that the first and last hour of a trading day are the busiest, offering the most opportunities – but even so, many traders are profitable in the off-times, as well. Still, academic evidence suggests that any patterns in market timing where one is able to consistently generate abnormal returns are generally short-lived, as these opportunities are quickly arbitraged away and markets become more efficient as traders and investors increasingly learn about the patterns.