Each futures market has its own unique time-of-day tendencies. Even if you’re a long-term trader, as opposed to a day-trader, you should be aware of this. At some point, you’re going to want to enter or exit the market. Know the times to seek out, and the times to avoid.
We look at time-of-day tendencies for two primary market characteristics; volume and volatility.
Volume is an indicator of liquidity. The higher the volume of a futures contract, the easier it is to buy and sell with narrow bid/offer spreads, creating less slippage. High volume markets are also less prone to wild price swings.
Volatility is associated with Risk. The higher the volatility of a market, the more you can gain or lose.
We’ll focus on six futures contracts; The E-mini S&P, the 10-year U.S. Treasury, Crude Oil, Gold, Corn, and the Euro.
We measure risk by looking at the Average Daily True Range for each market over the month of July, 2017.
By way of comparison, note that the potential for gain or loss in Gold was almost four times that of Corn.
Volume and trading range are not distributed evenly throughout the day.
For the E-Mini S&P contact, the opening and closing periods account for 30% of the volume. There is very light trading in the overnight time periods. This shows that even a market with overall high volume can go through illiquid periods.
In the overnight hours there is a disproportional high trading range, relative to volume. This is seen in many markets. Most people would view this combination of higher risk and lower liquidity as very unattractive.
The 10 Year U.S. Treasury has a volume spike at 8:30 in the morning. This is probably somewhat due to the fact that key economic announcements often occur at this time.
Be aware of the day’s scheduled news events and plan accordingly.
Note that Gold and the Euro come closest in this group to offering a 24-hour market. If you are limited in the times of day you can trade, these markets may offer more of an opportunity to fit your schedule.
The message is that market characteristics change throughout the trading day. Choose the times when those characteristics best fit your trading style, and the situation you find yourself in.