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A daytime trader has been bragging to his Foundations of Finance classmates that he has been making money consistently exploiting a little-known trick in the
A daytime trader has been bragging to his Foundations of Finance classmates that he has been making money consistently exploiting a little-known trick in the stock markets. When a stock opens 5% less than yesterday's closing price, he buys it in the morning. When a stock opens more that 5% higher compared to previous day's close, he short sells the stock. He reasons that markets over-react to bad as well as good news, and it corrects during the daytime. Hence, when the price goes down by more than 5% (could be due to bad news) it will recover some of the loss during the daytime. Similarly, when price goes up by more than 5% (could be due to good news) it will give up some of the gain during daytime. By the end of the day, he closes her position.
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