By Thursday, the uninformed Johnny-come-lately traders who have been following the bull market all week are finally ready to take the plunge. They want to get in on a “sure thing,” but have been cautious earlier in the week when, in fact, they should have been bold. They finally take the plunge by buying the top! You could make the same argument that stock investors are finally willing to sell their shares at the bottom, after being hammered on the prior three days. That’s the day, of course, when the market will rally — right after the uninformed abandon their positions. When you think about this, you might conclude it is all only human psychology. Most people are wrong at the significant market turns.
The cyclical nature of market behaviour is not a coincidence. It’s rooted in human emotions, driven by fear, greed, and the herd mentality. When traders finally gather the courage to act after a prolonged observation period, their actions often align with the peak or trough of market movements, precisely when experienced traders are making the opposite move. This phenomenon exemplifies why timing in the market is as much about understanding human behaviour as it is about analyzing technical indicators. To succeed, a trader must learn to anticipate the irrationality of the crowd and act counter to it. This psychological aspect of trading—often underestimated by beginners—is what separates seasoned traders from the rest.
This brings us to Friday when the weekly cycle is setting up again. If the market has been weak, traders will use the excuse to drive the market lower, and if the market has been strong, they drive the market higher. Whatever happens on Friday will be discussed over the next two off days, and a psychological bias will develop in the minds of traders who are resting and catching up with the news. There is a high degree of certainty that the effect will continue into the coming Monday. That is, if Friday has a down close, Monday tends to be a down close. And the cycle goes on.
This pattern highlights the importance of understanding the interplay between market psychology and timing. Traders, particularly retail investors, often digest market news and events over the weekend. This creates a feedback loop where Friday’s performance sets the tone for Monday. The repetition of this pattern over decades underscores its reliability. However, it’s important to note that these patterns are not set in stone and can be influenced by macroeconomic events, global news, or unexpected market shocks. Still, the weekly rhythm of the market provides a framework within which traders can navigate with a higher degree of confidence.
Fridays have other major forces to contend with. Fresh options series will start on the last Friday of each month. That option expiry week often generates unusual volatility which peaks on expiration day. Market action during this period can be highly unpredictable.
Option expiry weeks represent a unique challenge and opportunity for traders. The convergence of expiring options contracts forces institutional investors, market makers, and retail traders to adjust their positions. This rebalancing often leads to increased volatility, as large orders are executed to close or roll over positions. For astute traders, understanding the dynamics of these expiry weeks can be a significant advantage. They provide opportunities to profit from the predictable volatility, but they also require a clear strategy and risk management to avoid being caught on the wrong side of a sudden market move.
Some of the day-of-the-week behaviour discussed above has shown a high probability of repetition over many years. I would strongly advise you to combine the day-of-week, and any other seasonal behaviour, to time the market. I have deliberately repeated and added to what I had already covered in the earlier Chapter 9, “Day of the week” because the patterns I am going to discuss in Section 4 are based heavily on the market’s day-of-the-week behaviour.
Day-of-the-week effects are among the most well-documented anomalies in financial markets. These patterns, while not absolute, provide traders with an additional layer of insight when planning their strategies. For example, the “Monday Effect,” where stock returns tend to be lower on Mondays, or the tendency for markets to perform better on Fridays due to positive sentiment, have persisted over time. By combining these insights with seasonal trends, such as month-end rallies or pre-holiday optimism, traders can develop strategies that align with these recurring patterns.
Furthermore, these day-of-the-week patterns are not confined to equities alone. They extend to other asset classes, such as commodities, forex, and cryptocurrencies, where behavioural biases manifest in similar ways. The underlying psychological drivers—fear, greed, and the desire for security—remain constant across markets. This universality of human behaviour is what makes these patterns robust and applicable to a wide range of trading scenarios.
However, while these patterns provide a valuable framework, they should not be relied upon in isolation. Successful trading requires a holistic approach that incorporates technical analysis, fundamental research, and a keen awareness of market sentiment. It’s also crucial to adapt to changing market conditions. Patterns that worked in the past may evolve or diminish in relevance as market dynamics shift. This adaptability is what ensures long-term success in trading.
Additionally, traders must remain vigilant about the influence of macroeconomic events on these patterns. Economic data releases, central bank meetings, geopolitical developments, and other external factors can disrupt established trends. For example, a hawkish Federal Reserve announcement on a Thursday could negate the typical Friday rally as markets react to the news. Understanding these nuances and integrating them into one’s trading strategy is essential for navigating the complexities of modern financial markets.
In conclusion, the day-of-the-week behaviour and other seasonal patterns discussed above provide traders with a powerful toolkit for timing the market. By studying these recurring trends and combining them with broader market analysis, traders can enhance their decision-making and improve their chances of success. However, it’s important to approach these patterns with a critical mindset and a willingness to adapt to new information. The market is a dynamic and ever-changing entity, and staying ahead requires constant learning and evolution.
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Sagar Chaudhary is a trading enthusiast and researcher who specializes in pattern-based analysis and seasonality trading. With a focus on data-driven strategies, Sagar provides actionable insights to help traders achieve consistent success in the markets.
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