COMMENT
The UK Trader's Bible

By Ed Bowsher (TMFArkle)
October 10, 2005

Ever heard of the "9:30 reversal" trading strategy? Me neither. I first came across it when I read Dominic Connolly's book, "The UK Trader's Bible", an excellent guide to the UK stock market for novice frequent traders. I suspect battle-hardened traders will find plenty of new information as well.

So how does the 9:30 strategy work? It's simple. Connolly claims that the day's high or low for a stock often occurs at around 9:30 am. Apparently this happens more often than simple probability might suggest. What's more, this high or low often marks a change in direction for the share price. So a stock might fall for the first 90 minutes of trading, hit its low at 9:30, and then go up for the rest of the day.

Connolly reckons this strategy works particularly well for companies that released a significant piece of news before the market opened at 8 am. He isn't certain why the 9:30 strategy works; it may be connected to investment banks' morning meetings, or perhaps it's when fund managers start placing orders.

The 9:30 strategy isn't the only interesting snippet in the book. Connolly also profiles some of the leading shrewd investors in the London market. One example is Jack Petchey, an entrepreneur who looks for bargains in the property sector. Petchey buys holdings via his Trefick investment vehicle. Often companies that Petchey invests in become takeover targets shortly afterwards, so it's worth keeping an eye out for any stake building by Trefick.

Connolly also provides an excellent summary of the market maker's role in the modern market. He argues that private investors shouldn't spend time trying to analyse trades in a particular company. Investors often guess that a particular trade was a buy if the price for that deal was closer to the offer (buy) price than the bid (sell). Understandably, bulletin board posters then say: "there have been twelve trades this morning, all buys, but the share price is falling."

Normally the explanation for the fall is that a market maker is "working" a large trade, which he isn't obliged to report immediately.

Connolly also emphasises the importance of analysing the reasons for one's failure. I can't express it better than this quote:

"In my experience, the most successful traders I know spend most of their time talking about their losing trades, the least successful seem to spend most of their time talking about their few winning trades, and show an obsession with conspiracy theories as to why the market is out to get them."

So should you buy the book? If you only trade three times a year, this is not an essential read although you will probably find it interesting nonetheless. If you've just started to trade frequently, I'd urge you to buy.

You can buy Dominic Connolly's "The UK Trader's Bible," from the Fool Bookshop. Click here for more details.