The Open, lesson 2: Why the morning sets the afternoon
Most morning moves are noise. Why the real ones tend to carry into the afternoon, and how a rule tells them apart.
Most of what happens in the first hour is noise. Prices swing on a few orders and swing back. A rule that traded every poke above the morning high would trade all day and lose on costs. The Open only acts when a move is bigger than the market’s usual wandering at that time of day.
Rules
- Measure normal before you measure a break. The market’s own recent days say how far it usually wanders by each time of day.
- Early in the day the bar is low; later it is higher. A move that would be news at 10 o’clock is ordinary by 2.
- Inside the zone, do nothing. Flat is a position.
- When the move leaves the zone, trade with it, and get out when it fades back. The Open never fights the move.
What the evidence says
Why should the morning predict the afternoon? The research points to how big money works. Funds that rebalance and hedge do much of it late in the day, and traders who hear news late trade in the same direction the morning already moved. Gao, Han, Li and Zhou found the effect strongest on high-volatility days, which is when those flows are largest.
The Open trades both ways and both sides pay: from June 2019 to October 2026 its long trades made about $109,000 and its short trades about $94,000 per NQ contract. It holds a trade for about an hour in the middle case and never overnight.
Per NQ contract at $20 a point, after $2.50 commission and 2 ticks of slippage on each side, from June 2019 to October 2026, rounded.
Most traders who try this fail. A 2020 study of every individual who started day trading Brazilian index futures from 2013 to 2015 (Chague, De-Losso and Giovannetti) found 97% of those who kept at it for more than 300 days lost money. That is why The Open is a rule, sized small, and not a feeling.
Hypothetical results1, not actual trading. The full statement is at the end of this page.
Exercise
Take the ten sessions from lesson 1. For each, note how far price moved from the open by 10:30, by 12:00 and by 14:00 ET. Average them. That is your own rough picture of normal. Which breakouts were bigger than normal for their time?
The pointMeasure normal first: The Open acts only when a move is bigger than the market’s usual wandering for that time of day.
Check yourself
Price makes the same size move away from the open twice: once early in the session and once in the afternoon. How does the zone treat the two?
- The same, because a point is a point at any time of day.
- The afternoon move counts for more, because the late-day flows are bigger.
- The early move is more likely to count; by the afternoon the zone is wider and the same move can be ordinary.
Answer
C. Prices wander further the longer they trade, so the zone widens through the day. A move that would be news early is ordinary later.
Price has been wandering inside the zone all morning and you are getting restless. What does the lesson say to do?
- Nothing. Inside the zone, flat is a position.
- Take a small starter position in the direction of the open.
- Sell the top of the zone and buy the bottom until it breaks.
Answer
A. Inside the zone, do nothing. A rule that traded every poke would trade all day and lose on costs.
Price leaves the zone upward, The Open goes long, and later the move fades back. What happens next?
- The Open holds on, because the morning predicts the afternoon.
- The Open gets out as the move fades; it trades with moves and never fights them.
- The Open sells short, because the breakout has failed.
Answer
B. When the move leaves the zone, trade with it and get out when it fades back. The Open never fights the move.
Next: The rules
Education only. Nothing here is advice about your account.