The 10 AM rule is a very popular stock trading guideline followed by investors. According to it, traders should not trade in the very first hour when the market opens.
If we simply define the rule, do not buy/sell at the first hour of opening. The reason is that the market is way more volatile. Prices also fluctuate very rapidly. It is observed that usually the traders incur heavy losses and regret placing an order during this time.
This guideline plays a crucial role in protecting investors from making wrong choices. Imagine trading in a rush and having no time to make the decision. You will just look at which stocks are undervalued to buy and without thinking you will place an order.
Likewise, if you find your equities are overvalued, you will immediately sell them without analyzing them. It also entails that when the market is actually stable during the day, you will have nothing to place your bet on. Thus, it is way better to control your emotions and step away from stock trading in the morning.
Different Time Frames In the First Hour of Trading
Let us take it up a notch and divide the first hour into small time frames and learn what exactly happens. Once you know, you will understand why the 10 a.m. rule is so suitable.
- Initial 5 Minutes
During this time, you will witness a momentarily burst of activities happening in the stock market. Many traders take advantage of the prices and gain huge profits in the first five minutes.
- 9:30-9:50 AM
Mostly the trading activities continue during the next 20 minutes and become even more comprehensive. Prices keep on shooting and plummeting because of orders booked on the previous day and in the first five minutes.
- 9:50 to 10:10 AM
These 20 minutes form part of the 10 AM Rule. It is the time of order execution and matching orders.
Thus, you see how fast the first hour goes by in the stock market. So, stock trading in the first hour or not is a personal choice of investors and traders.