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From what I see, there are a number of advantages of buying or selling stocks during the opening and closing auctions:

  • Huge liquidity. The opening and closing auctions have the largest amount of liquidity of the entire trading day.

  • No need to worry about my execution speed. All orders during the auction get resolved at the same time and at the same price. I don't have to worry about "missing the price" as a result of my slow internet connection.

  • No need to worry too much about execution quality. Trading during the auctions completely avoids questions about payment for order flow.

  • Psychologically, I avoid thinking too much about the time I place my order. I avoid thinking of (possibly irrational) things like: "I should have placed the order at 11am instead of 2pm". I can more easily ascribe the execution price to "fate" rather than "poor timing". The opening and closing auctions are fixed times with the aforementioned advantages, so I can confidently place my order and immediately get on with my day.

Given these advantages, I have decided to completely avoid buying and selling during the continuous trading hours, and instead trade exclusively during the opening and closing auctions using market-on-open (MOO), limit-on-open (LOO), market-on-close (MOC), and limit-on-close (LOC) orders.

Is there anything wrong with the reasoning I have provided above? What are the disadvantages I should be aware of? Is it a good idea to buy or sell stocks during the opening and closing auctions only?

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Most days, the opening 1/2 hour to hour tends to be more active because of the volume of news stories overnight. Volatility is a trader's best friend. But that doesn't mean that it's the best time of the day to trade and the remaining hours should be ignored. You should buy and sell when your price is available not based on some predetermined list of perceived advantages.

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  • What about the closing auction? – Flux Apr 24 at 3:56
  • As an example of a technical indicator, a follower of the DeMark set up indicator would take the trade if there were 9 nine consecutive bars that closed higher than the previous four bars. He wouldn't care what time of day the set up occurred. – Bob Baerker Apr 24 at 12:16
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Liquidity is great, if you need it.

One of the main drawbacks is that there can be increased volatility and wider bid-ask spreads at the open, as the cash market reacts to overnight events and futures trading.

At the close, trading is dominated by institutional investors.

If you want to use a rule to avoid regrets from placing your order at the "wrong" time, you could wait until 15/30 min after the open/before the close, when the market is more stable and avoid the trading frenzy.

A seismic shift towards exchange traded funds and other index-tracking investment vehicles has heightened the importance of the last half-hour of the US trading day, from 3.30 to 4pm, when these passive funds typically conduct most of their activity to accurately match their benchmarks. That has prompted traditional active managers to conduct more of their trading during this window to benefit from greater market “liquidity”.

[...]

Indeed, what traders refer to as the “liquidity smile” formed by the pattern of trading volumes has recently become more pronounced and turned it into a “liquidity smirk” due to the lopsided importance of the 3.30-4pm trading window. Some now fret that, with so much money sloshing around in a small window, it increases the risks of market mishaps.

source: https://www.ft.com/content/9e1f05b4-43e7-11e8-803a-295c97e6fd0b

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  • "At the close, trading is dominated by institutional investors" — Is this a bad thing? – Flux Apr 26 at 16:06
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    @Flux not necessarily but it's also no guarantee that your odd lot will get better execution than it would at any other time of the day. Anecdotally, rallies and sell-offs can accelerate into the close, which can work in your favor, or against it. – 0xFEE1DEAD Apr 26 at 16:10
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    This is a crucial point. As a small investor, your odd lots are the main issue at hand, not the overall liquidity and certainly not your internet speed :) Odd lots never get the best treatment, at any time of day. That's life as a retail investor. – Orange Coast- reinstate Monica Apr 26 at 16:12
  • What if I trade only round lots? – Flux Apr 26 at 16:24
  • "there can be increased volatility and wider bid-ask spreads at the open" – For orders executed on open (which I think includes market orders placed outside of market hours which execute when the market opens), isn't the bid–ask spread exactly zero? There's just one opening price, and everyone's orders get executed at that price, including market orders, right? – Tanner Swett Apr 26 at 16:35
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You have in fact hit on a technique believed in by some traders.

It's a fact that many day traders and also swing traders, do exactly what you say.

For various reasons (some what you say, some otherwise) there's a coterie of traders who only trade the open, close, or both of those.

You can visit any "trading chat" site and immediately find a billion words of argument on precisely this issue. Any number of You Too Can Make Millions By Day Trading Or Getting On The App Store books take this position. You've stumbled on to a "hot issue".

Regarding your question,

Is there anything wrong with the reasoning I have provided above?

Yes, your reasoning is wrong because...

  • All trading ideas are just ideas

  • Given trading idea "X", take some Actual Money and trade with it for awhile

  • You will soon (unfortunately, often very soon) agree that Ideas, Theories and Arguments about trading are worth: 0.

There's a sea of ideas and theories, all of which are rendered utterly useless in the face of one action.

It's a case of "go for it and report back", you know?

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    You will soon (unfortunately, often very soon) agree that Ideas, Theories and Arguments about trading are worth: 0. You'd be surprised how valuable a trading idea is when a blind squirrel finds a golden acorn :->) – Bob Baerker Apr 26 at 13:23
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    With all due respect, "your reasoning is wrong because ideas, theories and arguments about trading are worthless" is a ridiculous argument. An answer which says "your reasoning is wrong," but which does not point out where the reasoning is wrong, is not a good answer. – Tanner Swett Apr 26 at 15:01
  • @TannerSwett , no worries but you may have misunderstood me. "Trading ideas are really worthless until tried out" – Fattie Apr 26 at 15:03
  • @BobBaerker I'm not sure I understand your comment. Does "blind squirrel" refer to ignorant amateurs like myself? :-) – Flux Apr 26 at 16:03
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    @Flux - If you find a trading edge, it doesn't matter if you're an amateur or a pro. It also depends on what you consider to be an edge. Some think of it as only a strategy that has a higher probability of working out (a blind squirrel's acorn). Others might consider it to be skill and experience. Don't take it too seriously until you find one :->) – Bob Baerker Apr 26 at 18:18

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