A trading friend mentioned that Monday was often a difficult trading day. In contrast, Friday often sees my least successful plays. Why do some days prove more successful or treacherous for traders than other days?
The reason may relate to situations particular to traders. By Friday, I'm tired. I may also have participated in a number of profitable trades by Friday, and may be overconfident and entering riskier trades. That's what happened this Friday, even though I know my own trading record.
The reason may not be as important as recognizing one's own trading record and then making appropriate trading plans. And sticking to them. Since I've documented my record, I know that I should limit the size of any trades entered on a Friday, and should pay particular attention to the setup. Is that setup sound or am I anticipating a setup, entering before I have enough confirmation?
Some days might be more difficult than others because of patterns related to days of the week. Martin Pring refers to such a day-of-the-week effect in TECHNICAL ANALYSIS EXPLAINED. The term "blue Monday" proves applicable, Pring explains, with Monday's weak performance seen in equities, non-U.S. equity markets, debt instruments, and even in commodities. My trading friend might find the reason for that less-profitable Monday trading record anchored in this effect. The study Pring quotes, a somewhat dated one, pegs Monday as the only day to see a negative return over a period of time. A cursory glance at more recent studies and thesis papers corroborates this effect across many equity markets across the globe, however, continuing into the present.
Moreover, many of these studies mention that Mondays see the most volatility or deviation from the mean return for a Monday. Middle-of-the-week days tend to have less volatility. Although more recent studies conducted on other markets show some variability, Friday tends to be less volatile than other days, and, according to the chart Pring includes, it tends to be the most positive day on average.
Why would this day-of-the-week effect exist? In a 2003 article in APPLIED FINANCIAL ECONOMICS, "Stability of the day of the week effect in return and in volatility at the Indian capital market: a GARCH approach with proper mean specification," authors Kaushik Bhattacharya, Nityananda Sarkar and Debabrata Mukhopadhyay proposed a theory. "These findings on the day of the week [sic] effects . . . suggest that stock exchange regulations and the nature of interaction between the banking sector with the capital market could possibly throw valuable insights on the origin of the day of the week" effect. Authors Dan Galai and Haim Kedar-Levy draw a different conclusion in "Day-of-the-Week Effect in High Moments," published in FINANCIAL MARKETS, INSTITUTIONS & INSTRUMENTS. They report, as do many others in studies performed across the globe, greater volatility in the first trading day of the week. They theorize that the "probable explanation of the phenomenon appears to be information dissemination: corporate announcements released after closing of the last trading day of the week spill-over [sic] to the opening of the first trading day, increasing its variability."
Gauging likely spillover effects and monitoring the interactions of the banking sector with the capital markets might prove difficult at best each Monday. Jonathan Levinson helps those of us reading the Market Monitor to anticipate some of those interactions. Still, Monday's general weakness but volatility or deviation from the mean certainly give my trading friend an excuse for those less-profitable days. I have another explanation for the aggregate less successful results I have on Friday: the fact that once a month, option expiration occurs on a Friday.
Consider including a day-of-the-week column in your trading journal. Do some
quick calculations and discover
whether a particular day of the week often
proves less profitable than others. Then limit your risks on those days, avoid
trading those days at all, or ensure that your setups are stellar to help
improve that trading pattern.