Listening or reading the news while sitting down for breakfast on any given working day, you are likely to find commentators saying “the market is ready to open higher” or “we expect the market to open lower.” Hearing these predictions may make you I want to know how these experts predict the future and why investors care about the direction of market opening.
After all, the closing price will tell you how much money you made or lost in your portfolio that day. There are more behind-the-scenes stories than you think.
- When the market closes in the afternoon of each trading day, stock trading will suddenly stop, and there will be a few hours of uncertainty between then and the opening of the next day.
- Predicting where the market will resume trading when the market opens can help investors hedge risks and bet on the next day’s price movement.
- After-hours trading in stocks and futures markets can provide a glimpse, but compared to normal trading hours, these transactions tend to be less liquid and more volatile.
- In order to better understand the situation, investors pay attention to the international markets opened during the U.S. market break and economic data released by various countries or data released by companies.
Predict the possible direction of the market opening
Before we understand why some investors closely follow the possible direction of opening, let us first look at some indicators that will help them accomplish their tasks.
Although the financial market clearly defines business hours, developments outside these hours continue to affect the value of securities and investor behavior. For example, geopolitical events and natural disasters can happen at any time. Incidents such as the assassination of the current president or major terrorist attacks may indicate a significant drop in market opening rates.
Enterprise data also plays a role. The profit announcements made by major companies after the market closes or before the market opens can influence the direction of the market. During January, April, July, and October, the vast majority of companies released their results for the quarter. Good news from leading companies usually causes the stock market to open higher, while bad news can have the opposite effect.
Other important news appeared before the market opened. Various economic data including employment data, retail sales and GDP results will be released at 8:30 am. Once again, both good news and bad news can influence the direction the market opens.
After-hours trading activity is a common indicator for the opening of the next day. The extended trading hours of stocks are carried out on the electronic market called ECN before and after the financial market opens.
Such activities can help investors predict the direction of the open market. In fact, indicators such as the Nasdaq-100 pre-market and after-hours indicators are designed to track extended business hours activities specifically for this purpose.
Similarly, trading is almost 24 hours a day, and index futures can indicate the trend of the market at the beginning of the next trading day. Standard & Poor’s 500 index futures are often used by money managers to hedge against risks within a certain period of time through short-selling contracts, or to increase their stock market exposure through buying.
Unlike the stock market, the futures market is rarely closed. Futures contracts are traded based on the value of the stock market benchmark index they represent. S&P 500 index futures trading is based on the value of the S&P 500 index, just as the Dow Jones index futures trading is based on the value of the Dow Jones Industrial Average.
Since the securities in each benchmark index represent a specific market segment, understanding the futures contract pricing direction of these indexes can be used to predict the price direction of actual securities and their trading markets. If Standard & Poor’s futures show a downward trend throughout the morning, then stock prices on the US exchanges are likely to fall when the market opens that day. Once again, the opposite is true, and rising futures prices indicate a higher opening price.
In addition to providing market access almost 24 hours a day, a major benefit of futures is its high level of after-hours liquidity compared to stocks traded on ECN. This liquidity provides a smaller spread, which is important because the greater the spread, the more favorable the transaction must be for you to achieve a balance of payments.
How the international market affects opening
When the domestic market was closed that day, the international market was open for trading. The good days in the Asian market may indicate that the US market will open higher. The devastating losses overseas may lead to a decline in the domestic opening rate.
By paying attention to foreign developments, domestic investors can understand the expected direction of the local market when the market opens that day.The major stock exchanges in Tokyo, Frankfurt, and London are often used as a barometer of what is going to happen in the U.S.
Serious market observers wake up early, pull data, and use these various indicators individually and in combination to predict the opening trend of the US market. Less ambitious investors only need to check social media sentiment or listen to the morning financial news broadcast to hear the person in charge of the conversation provide the latest news about the day. Either way, it is possible to obtain a fairly reliable interpretation of the expectations at the beginning of the US transaction that day.
Why the direction of openness is important
The market direction brings opportunities. Broadly speaking, if the market will rise, individual stock prices may also rise. Short-term traders can make buy/sell decisions based on the information. For example, if the market is going to rise, and then a technology company releases good news before the market opens, the company’s stock is likely to rise at the market opening.
For investors who hold stocks, this may be a signal to sell and lock in profits. For investors who do not hold the stock, this may be a signal to buy early and sell in a rising market. Remember, if you only have a few dollars to invest, the practice of tracking the market direction may be meaningless.
On the other hand, if you can buy 100,000 shares that are up 2 cents per share, you can quickly make $2,000 (ignoring transaction costs)-not bad for an hour’s work. If you can buy 500,000 stocks that are up 10 cents, you can quickly make $50,000, and the numbers will rise from there. For large institutional traders, these measures can make a lot of money. In the era of rapid development of electronic trading, even if the price change is only a fraction of it, it can bring huge benefits to traders with strong financial resources who make the right decisions.
It may be a useful tool to accurately predict the opening trend of the stock market. If your forecast is accurate, you have a chance to make a profit. Of course, the first step is to correctly judge the market direction. This step alone is not enough to make money.
You also need to choose an investment and successfully measure the impact of market trends on your investment in order to make money. You may not be able to make a correct guess about the direction of the market, and the market may move in the opposite direction to yours.
Even if you are in the right direction, you need the right investment to generate profits. In short, there is no guarantee that you are in the right direction or that your investment will be rewarded.
As with all investment strategies, before placing a bet on the opening direction, you should conduct a thorough analysis while understanding your strategy and its impact.