The time of day plays a significant role in short-term momentum trading, as market activity and volatility vary throughout the trading session.
To illustrate, let’s consider the US markets:
Market Open (09:30 – 11:00 ET): This is one of the most volatile periods due to the influx of overnight news, earnings reports, and pre-market positioning. High volume and sharp price movements are ideal for momentum traders looking to capitalise on quick breakouts or reversals. Patterns like opening range breakouts and gap fills are common during this window.
Midday Lull (11:00 – 13:30 ET): Trading activity often slows down as institutional traders take a break and market participants digest the morning’s moves. Lower volume can lead to choppier price action, making momentum strategies less effective. False breakouts and whipsaws are more likely during this quieter period.
Afternoon Session (13:30 – 16:00 ET): Volatility typically picks up again as traders position themselves ahead of the close. This is another prime window for momentum strategies, especially when volume surges during the last hour (the ‘power hour’). Patterns like trend continuation or late-day breakouts are more likely to emerge.
Momentum strategies tend to be most effective at the open and in the final hours of trading, when volatility and volume are highest.
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