Benjamin Franklin famously stated: “Early to bed and early to rise, makes a man healthy, wealthy, and wise.”
However, it’s the famous night owl Willie Nelson who reminds us: “The early bird may get the worm, but the second mouse gets the cheese.”
In the world of trading, like most competitive environments, how early you rise is often seen as a badge of honor. Caffeine-fueled traders like to brag about being up at 4 a.m., devouring the international news at 6 a.m., trading in the premarket at 8 a.m., and then jumping into the opening bell frenzy right at 9:30 a.m.
Nicolas Darvas, the inventor of the Darvas Trading System, was actually more likely to END his day at 4 a.m. than start it at that hour as he famously traveled the world and thoroughly enjoyed the night life.
For the Darvas System trader (and nearly any type of trend trader), jumping into the market right at the open is actually detrimental to your trading results.
The first half-hour of trading is typically the most chaotic of the day as breaking news gets digested, rumors get sorted out, and stock prices swing wildly.
There’s an old maxim on Wall Street that essentially says, “The dumb money moves the market early in the day and the smart money moves it late in the day.”
This isn’t just a clever saying; it’s absolutely true as the big funds usually make their most aggressive trades in the last hour of the trading day. This is why, when analyzing market conditions, the action in the last half-hour of trading is much more telling than what happens in the first half-hour of trading.
Unless you’re a day trader trying to catch minuscule price moves and scalp your way to a daily income, there’s rarely ever a good reason to trade during the first hour of a new trading session. (The only exception is if a stock hits your previously-determined stop, which should always be executed immediately – regardless of WHEN it gets hit.)
For Darvas traders, the ideal time to trade is in the last half-hour of the trading session. At that time, you’re able to analyze a full day of market action.
Has a stock held above its breakout point or did it fall back below its previous resistance line? Has the required volume come in to confirm a breakout or did trade slow down as the session wore on? On the down side, did a stock finish the day below a key support level or did it rebound higher as soon as it tested such a level?
These are all questions that can only be answered by waiting until the end of a session to trade.
So many bad trades can be eliminated by simply avoiding the early-market noise.
For instance, a stock can often gap-up and surge through a breakout point early in the day. At 10 a.m., everything looks great as the stock races towards new highs on heavy volume. However, by 3 p.m. it’s quite another story as the stock reverses during the day, closes its gap, and actually finishes LOWER on the session. Such behavior clearly negates a breakout and you would then end up selling the stock for a loss. You could have avoided this loss entirely had you simply waited until late in the day to make the trade.
The obvious drawback to this rule is that when a stock does break out early and climb throughout the session, you will miss a portion of the move by waiting until late in the day to enter your position.
But remember, as Darvas traders, we’re looking for stocks that are going to give us gains of 30%, 50%, 100%, and more. Missing 1% or 2% of the move on the breakout day isn’t a huge price to pay if it means that we’re able to avoid more failing breakouts in the long run.
* For more on the Darvas Trading System, including our current portfolio of stocks and everything on our watchlist, with EXACT buy points and sell points, check out Darvas Trader PRO, the newsletter for Darvas System traders.