What your about to learn has nothing to do with using a stock screener. If you want to greatly improve your stock trading skills and accuracy, you need to learn this secret.
A retired institutional investor told me this secret years ago. The amazing thing is that this simple secret still works today. My accuracy now hovers around 80% thanks to this secret. I use it every week and I’m going to show you how you can use it every week as well.
No doubt you have heard the phrase “two minds can think better than just one”. I have a new phrase for you as it applies to this trading secret: “3 Professional Brains Can Produce What 89,697,618 Unprofessional Brains Can Not”
There is more than 85 million traders in the U.S. alone and yet none of them have discovered the secret I’m about to tell you. Is this because most traders are ignorant? No it is not. The reason is that institutional investors have a range of tools that give them better insight into the market and in spotting trends before the average trader.
The secret is called the Weekend Effect. The Weekend Effect can be summarized like this: trading action is lower on Friday and Monday and returns are lower on Monday.
Miller did a study in 1988 that proved that returns are usually negative on Monday. Miller’s research seems to suggest that the reason behind this is individual investor trading. In a second study, Lakonishok and Maberly (1990) and Abraham and Ikenberry (1994) used what is known as odd-lot trading as a measurement for individual investor trading patterns and found evidence consistent with the Miller hypothesis.
Volume is less on Friday’s because institutional traders are not buying as evidenced by the absence of large-size trading activity. In fact, institutional traders will close out their trades on Thursday or the very latest on Friday because they do not like to hold open positions over the weekend.
Trading activity is significantly lower on Monday for large-size trades. Moreover, small-size trades have a higher percentage of sell orders on Monday morning compared to other days of the week. If small-size trades reflect individual investor activity and large-size trades reflect institutional investors then both types of investors play a role in the negative return on Monday. The individual traders directly contribute through their trading and institutional traders indirectly contribute through their withdrawal of liquidity on the proceeding Thursday or Friday. Institutions indirectly contribute by their absence on Friday and Monday, which reduces liquidity.
You can increase your odds of having a money making trade by going long on Tuesday and taking profits on Thursday.
Now that you know markets often sell off on Monday, you can buy Monday’s sell off. At the very least, don’t sell your long position on Monday. Early Monday trading has the greatest percentage of downside head fakes.
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