How to profit from the opening bell

Opening ceremonies are a big deal at stock exchanges around the world.

On Wall St in New York, it’s a bit like switching on the Christmas lights – some celebrity is dragged in to press a button that rings brass bells on each floor.

Lots of flashbulbs going, and plenty of buzz.

In London, where we might expect the City to have held on to tradition – they’ve instead tried to move with the times.

After the old bells were ripped out in 1986, “The Source” was established in the London Stock Exchange. This was a sculpture of balls suspended on cables that, when switched on each morning, moved up and down to represent share price movements. (A bit like a giant lotto draw machine – with strings on.)

The sculpture, which no doubt was marketed as “inspirational” and “awe-inspiring”, was laughed at and became an embarrassing white elephant in the heart of the LSE central atrium. So, when chief exec Xavier Rolet took over in 2009, he ripped it out – replacing it with, er … one huge ball and 500 TV screens.

Clearly someone has been making a lot of money from these opening ceremonies.

However, you don’t need to be a minor celebrity or a designer of round sculptures to cash in on the opening bell. So I want to look at how we, as traders, can profit from these key moments in the markets’ day.

Opening bell strategies

Market openings – whether they are heralded by a celebrity or a giant blue ball – are almost always accompanied by some big price moves.

What we see, again and again, are some violent swings at the start of the day, as the market fills orders that have built up overnight, and finds its direction.

And whenever we see violent swings – we see profits.

Which is why traders (myself included) have for many years strived to find ways to profit from these opening moves.

The first thing to do if we want to catch these profits is to know when it’ll happen.

The all-important times to watch out for are at 8am in the morning, when we have the European markets opening … 2.30pm when the New York bell goes … and at midnight, as Tokyo opens.

Because trading is done at desks these days, rather than in the stock market pit, the action doesn’t actually have to wait for the bell. The bell is really just symbolic – most of the action is already going on by the time Nicole Scherzinger has pressed the button.

The next thing we need to know is what’s causing the prices to move so much at these times?

How to profit when the bell rings

The opening price of the market is based on the influx of overnight orders. If market makers see more buy orders coming in, they will open the market higher, forcing these orders to overpay.

If they see more sell orders coming in, they open the market very low.

Many traders will jump in immediately, trying to profit from the fact that the instrument is relatively overpriced or underpriced in those first moments of trading. And that’s what causes push and pull we see in opening ranges. It’s a risky strategy as it’s very difficult to gauge how far overnight sentiment can drive the markets.

Which is why the more cautious trader will hold fire.

These opening ranges that occur in the first 15 to 30 minutes of trading are usually followed by a breakout. This breakout is very important because it tells us who is taking control of the market – the bulls or the bears.

And the best opportunity to make a profit from the opening markets is to trade these breakouts. So now is when we make our move.

Here’s an example on the FTSE this week …

Trading these “opening bell” breakouts can be extremely profitable. But, like all the best trading opportunities – there are traps that we need to avoid.

The trick is to scale and time these trades so that we can take advantage of the big moves, without getting snarled up in the push-me, pull-me immediately on the open.

The good news is that with the right parameters, this is incredibly simple to do. And next month I’ll be giving you the full low-down on a trading strategy that’s been doing exactly that over the last 15 months.

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