What time of the day is the most volatile in trading? Most traders assume the first and last hour of trading (in any market) is the most volatile of the day. News from overnight trading needs to be discounted when the market opens, and during the last hour funds and traders rebalance their portfolios. Is it correct that the first and last hour is the most volatile of the day? In this article, we look at which time of the day is the most volatile in stocks, Swiss franc, gold, and oil.
In stocks, the most volatile time of the day is, on average, the first hour. The least volatile time of the trading day is the last hour. In the other markets, the most volatile time of the day varies.
Related reading: – A massive library of trading strategies
Let’s explain how we backtested and came to our conclusions:
How do we test which time of the day is the most volatile in trading?
We use US official exchange trading hours, meaning 0930 to 1600 (930 AM to 4 PM) New York time. Thus, the 6.5 hours of trading needs to be divided into “sessions”:
We divide the trading day into four parts:
- The first hour of trading
- First midday session – the next 2 hours
- Second midday session – the next 2.5 hours
- The last hour
We test the following four futures contracts (not ETFs):
- The S&P 500 contract
- The Swiss Franc contract
- The Gold contract
- The ETI crude oil contract
We chose these four because they are all pretty different from each other and have different attributes.
The S&P 500 and Swiss franc trade in Chicago and the latter in New York. We use 0830 local times as open in Chicago and 0930 in New York, and 1500 local time as close in Chicago and 1600 in New York.
We use a 200-day moving average to smooth the data. This means the volatility results are based on the last 200 days and will move slightly up and down (smoothed).
What is volatility?
Let’s first define volatility. The money manager Fidelity defines volatility like this:
Volatility is the rate at which the price of a stock increases or decreases over a particular period.
The more the price fluctuates, the more volatile the asset is. Volatility is often seen as a measure of risk expressed as standard deviations. All of the financial theory is based on this assumption, but the evidence makes it clear that this is a somewhat faulty assumption.
For example, over the last 50 years, the worst group of stocks has been the most volatile small-cap stocks. According to theory, this should not be the case, but that is what the backtests by Roger French reveal.
The legendary investor Warren Buffett has repeatedly said volatility is a poor measure of risk. Quite the opposite, we should take advantage of volatility, according to him!
How do we measure volatility?
In the backtests below, we have measured volatility like this:
In our backtests, we measure the high and low per hour/session/time of day and divide by the day’s opening price.
What time of the day is the most volatile in stocks (S&P 500)?
We use the S&P 500 as a proxy for the stock market and get the following volatility curves by using intraday data and Amibroker:
As you can see, the most volatile time of the day is the first trading hour, perhaps as expected.
Opposite, the last trading hours of the day is the least volatile, and that might come as a surprise for many (?).
Which time of the day is the most volatile in the Swiss Franc?
The first midday session is the most volatile, while the last hour is, by far, the least volatile.
What time of the day is the most volatile in gold?
Let’s switch to the gold contract, which is heavily influenced by macro events:
In gold, the most volatile time of the day is the first hour, and the least volatile is the last hour. Remember that we only measure regular trading hours and not the 23-hour trading session.
Which time of the day is the most volatile in oil?
Our last test of the day is the oil futures contract:
As expected, the last hour is the least volatile, while the others seem pretty equal. The regular trading session in oil ends one hour before stocks, and it’s expected that the oil price is hardly moving after the stock market sessions ends.
Which time of the day is the most volatile in trading?
What time of the day is the most volatile in trading varies from market to market. In stocks, for example, perhaps the most followed market on the planet, we see that, on average, the first trading hour is the most volatile and the last the least volatile. However, in the Swiss Franc, it’s the first midday session and not the first hour.
However, as usual, please do your due diligence when you backtest.