This was a topic that recently came up in the Inner Circle Membership about why I wait towards the end of the day to enter and exit credit spreads. If you want to use credit spreads to grow your account and generate a side income, then you need to know how to get the best entry when trading them.

It is super important when you enter a credit spread because the time of day and price you pay when you enter the trade will directly affect your max profit and win rate percentage. Credit spreads are an interesting trading instruments where the amount of credit you collect is directly proportion to your win rate.

Backtested Strategies Are Built Around The Daily Close

If you are trading a strategy that has been backtested and proven to be profitable over X amount of years, that strategy is based on the daily close. Why? Because backtesting requires traders to use historical data to validate trading rules and test profitability. However, most historical data only shows the daily open price and the daily close price. Most strategies base their entry and exit criterion on the daily close price because it is the most realistic when testing.

Therefore, in order to achieve the same results as a backtest, you need to mimic exactly how the backtested strategy behaved which is buying near the market close. This is exactly why I buy near the market close because the strategies that I use that have an over 90% success rate are all based on the daily market close, so the closer I get to mimicking that strategy, the closer I will get to attaining a 90% win rate.

More Liquidity and Less Volatile

Typically, an asset can’t be more liquid and less volatile. Liquidity means that there are more buyers and sellers available. That is important because the stock market and options market is a zero sum game which means for every buyer, there must be a seller. Volatile or volatility means how much a stock is moving. There is a lot of movement from stocks in the first 10 minutes of the trading day, but not as much as near market close.

With liquidity being higher, traders can be able to get into positions more easily since there are more buyers and sellers present. Also, since volatility is lower than it is in the morning, traders will be less scared and uncertain right after they put the trade on. It is a fine balance to find in the market, but more times than not, it happens within the last 30 minutes of market close.

Thanks for reading 🙂
Austin Bouley
CEO & Chief Strategy Officer