Generally, active traders who are watching and trading the market all day tend to break the trading session into three broad divisions, each lasting about two hours. Both the first and last segments are characterized by heavier volume, while the middle two-hour period is relatively light. If we want to refine the stages a little more precisely, we can break down the trading day into five stages, each one having a particular event that characterizes it.

The first stage is what is called the clearing stage at the open of the market. It usually lasts about 20 minutes into the new trading session. It is during this time that the market makers on the NASDAQ and the specialists on the New York Stock Exchange must execute all the orders that have accumulated since the close of the market on the previous day. The opening of the market is usually a particularly volatile time, with strong volume¡ªoften the strongest volume of the day¡ªand not considered a good time for inexperienced investors to try and trade.

One reason for this volatility is that the market makers have a distinct information advantage over the casual investor, who has no idea what kind of orders have accumulated overnight and are stacked up, waiting to be executed. Because of this, the unaware and naive investor can be caught in a ” whipsaw” effect wherein he or she pays too much for a stock, not knowing what the market maker does: that the price will be brought down as soon as the accumulated orders have been executed.

In other words, the opening bid and ask prices may be set artificially high so that market makers can clear their slates of waiting orders, and then bring the stock back down. When you watch Level II quotes or even Level I quotes from premarket trading up until the time the market opens at 9:30 A.M. EST (6:30 A.M. PST), it is easy to see how bid prices are often inflated. This gives the impression that the stock has been bid up in premarket trading and that it is going to jump upon opening. Sometimes this is an accurate reading of what is happening. But often, it is not. Since the bid price has been artificially jacked up, the offer price gets inflated, too.

If you jump in to buy at this early point, you will often be paying too much for the stock, only to see it drop quickly within the first 20 minutes or so of the opening. So it is not the time to buy. But it can be a good time to sell, often representing the highest bid price of the day.

Short-term traders who hold positions overnight like to take advantage of these inflated opening prices. They may buy stock at the close, in hopes of seeing it “gap up” at the opening. They sell their positions before the market makers bring the stock back down. So, for experienced traders, the opening of the market can be a good time to sell stock. And it can be a good time for casual investors to sell a position as well, either by having a limit order in place, or by watching the action closely and then “hitting the bid” when they see a price they are happy to sell at.

Again, just to emphasize: the opening of the market is a terrible time for the casual investor to try and jump in to buy stock. Putting in a market order to buy at the opening is one of the most common and foolish mistakes that inexperienced or unknowledgable investors make. The simple rule here for investors is: Never try and buy any stock with a market order at the open. And, in this case, never really means never! You are guaranteed to pay the highest possible price the market maker can get you to pay and cursing yourself for your mistake an hour later.

The cliche in trading circles is that the first hour of the market is called the “amateur hour” because all the beginners make all the wrong moves for all the wrong reasons in this first hour. Investors need to sit back patiently and watch how the action unfolds. They need to see what the trend for the morning will be. It is usually unwise to try and buy anything during the first hour unless you are an experienced trader who knows how the market gets manipulated during this period.

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