Inside the Trading Day: Intraday Seasonality

Most investors understand that the old saying “sell in May and go away” has to do with seasonality. But seasonality refers to the internal trends of the market, not warmer or colder weather.

What you may not know is that “seasons” occur in both micro and macro time frames. Intraday seasonality is one of the lesser known time frames, but one that you should pay attention to if you’re an active trader.

Breaking Down the Trading Day

To illustrate this, we need to break the trading day down into segments. We’ll call them morning, midday, and afternoon sessions. They correspond roughly to the time frames (all ET) from 9:30 a.m. to 12:00 p.m.; noon to 2:00 p.m.; and from 2:00 p.m. to the close at 4:00 p.m.

Each session has its own characteristics, but the most important factor—and the one traders need to pay attention to—is volume.

The morning and afternoon sessions have the highest volume, but for different reasons. In the morning, there’s increased trading volume based on overnight news (see figure 1). In the afternoon, volume surges as traders—including those from large institutions—attempt to flatten short-term positions or add new ones before the close.

Traders may have their best opportunity to get in or out of positions during these two early and late sessions. The increased volume provides liquidity, which narrows the bid/ask spread and reduces the chances of random, outsize price spikes.

However, even these micro-seasons have internal seasons. The rush of orders at the open and going into the close can cause excessive volatility, which can be perilous for traders. That’s why some professionals prefer to avoid entering orders during the first and last 30 minutes of the trading day.

When to Step Aside

Just as the morning and afternoon sessions offer an active environment for traders, the midday session might be one to avoid thanks to its lack of volume. Traditionally, volume was reduced during this time because human traders (who used to be responsible for transacting trades) needed to eat lunch, and were less active. Today, much of the trading volume is now automated by computers. The midday lull is mostly caused by a lack of news and data flow during the middle of the day.

This low-volume environment causes spreads to widen, price action to meander, and allows for random—albeit temporary—price distortions. Managing an open position through the midday session is often necessary, but initiating one during this time period is generally not optimal.

Interestingly, midday session characteristics tend to occur in all three intraday sessions on the last trading day before a holiday—especially if it’s a shortened trading day. Again, this is partly due to the light volume associated with a lack of news flow around holidays. For example, economic reports and earnings are not announced the day before Thanksgiving.

The longer the market is closed, the higher the chances that there will be news flow, either micro or macro, that will affect stocks. Traders don’t want to get stuck with an open position they can’t close quickly if that news is negative for their holdings.