Traders are always looking for market strategies that they can exploit to make profits, and one of the most successful, yet “buy the close sell the open” has been an unknown strategy to most.
In this article, we will look at what is behind the buy the close sell the open strategy, and how you can use it to your advantage.
What is the “buy the close sell the open” strategy?
The buy the close sell the open strategy revolves around buying equities when the market is closing, and selling it when it opens.
Since day traders are likely to put trades on the open, which in most trading days means going long, stocks tend to rise more when the market opens.
At the end of the day, these same traders will be looking to close their positions, which means they will sell. Therefore, creating a pattern where the market tends to trade lower at the close, and higher on the open the next day.
Traders may take advantage of this slightly unknown fact by going long at the close of the market and selling the next day when the market opens.
Buy at the open: Buy at the open means that investors will buy stocks right after the market opens.
Buy at the close: Buying stocks when the market is about to close, towards the end of the trading session.
Sell at the open: Selling stocks when the market opens.
Sell at the close: Selling stocks when the market is about to close.
Does “buy the close sell the open” work?
According to Bespoke Investment Group, which ran a study since the inception of the SPY, which is an index fund that tracks the S&P 500, the strategy seems to clearly work. They also compared the alternative strategy, which is to buy the open and sell the close. There is a clear indication that on average stocks tend to trend lower towards the end of the trading day, and upwards when the market opens.
Source: Bespoke Investment Group
Buying the close selling the open with individual stocks
Although it seems clear that this strategy works with an index fund, it is unclear it if works over the long term with individual stocks. Unless you know exactly what stocks you are picking, you mind as well apply this strategy with index funds, rather than trying to pick stocks within this strategy might be a waste of time.
This is because individual stock prices move depending on several factors. There is also no empirical evidence that this works with individual stocks. Although it is possible, who knows what criteria traders would have to use to pick these stocks.
Is buying at close and selling at open a day trade?
Technically it is not. Day trading entails buying and selling or selling and buying a stock in the same day. Since you are holding it overnight, this is not day trading. However, the level of risk associated with it is high, because you are trading in a short period of time.
Is it better to buy in the open or close?
According to the research, it is far better to buy stocks at the close. This is because intraday traders will often take long positions at the open, and towards the close, they will be selling those positions. Therefore, it is better to buy at the close.
Is it better to sell in the open or close?
Following the same principle, it is better to sell at the open, since traders will often build long positions when the market opens. Since they will close most of these positions at the end of the day, you want to avoid selling stocks at the close because they will likely trade lower than at the open.
Can I buy a stock before the market opens?
No, you cannot buy a stock before the market opens. However, you can place trades before the market opens, and this is commonly called as after-hours trading. Although these traders can be placed, they will not be executed. Any trade can only be executed when the market is open.