Understanding Specific Time Zones during the Trading Day
Having a successful trading career not only depends on the trading system or style that you use but also depends on other intangibles, such as day trading time zones. Understanding the market dynamics during different times of the day will take your trading to the next level.
Think about your trading history and notice if you see a pattern in the different day trading time zones in relation to winning and losing trade percentages. What a day trader must understand is that even if a chart has a great setup, the time at which the trade is placed may be in a day trading time zone which typically starts a countertrend move. For example, many traders who day trade breakouts will be far more successful during the first two hours of the day than any other timeframe during the day. Typically breakout attempts will fail and reverse which will only serve to frustrate the trader and cause you to doubt your approach to trading.
Let's now take a look at the different time zones and understand the general market dynamics during each time zone.
Day Trading Time Zones
The opening bell - 9:30am to 9:50am
The first 20 minutes of the day are the most volatile of the trading day. While this is the most dangerous day trading time zone, it can also provide to be the most lucrative if you understand how to trade in this time frame. It is usually recommended that novice traders stay out of this zone and wait for the imbalances created from overnight news or earnings releases to settle down. Many technical indicators do not work well in this time frame as the volatility is too strong. In most cases, volume will also be the highest of the day during this time.
The Morning Reversal- 9:50am to 10:10am
The first reversal zone of the day begins at around 9:50am and lasts for 20 minutes. This is a very important period of the day for day traders. I look for this time zone to put on continuation trades. For example, a stock may gap down by 10% on the open and then bounce for 10 to 15 minutes coming into this time zone. However, this is where day traders will look for a reversal of the bounce and a continuation in the primary trend. Once the dust has settled from the opening bell, you will be able to more clearly see what the traders in this security will want to do. Volume will drop off a little bit compared to the open but will still be very high during this day trading time zone. This time period is my favorite for trading as the price stability returns to the market but volatility is still present for profitable trading. In strongly trending markets, reversals may be small or non-existent
Low Risk Trading - 10:10am to 10:25am
During this day trading time zone, volatility shrinks again and you want to look for clues in the Dow, S&P, and Nasdaq as to the direction that the market wants to take. This is an opportune time for bigger traders to move the market the way they choose. Watch the tape of the stocks that you track for any indications of direction.
Decision Time - 10:25am to 10:30am
The market will be settled for the most part and most of the days volatility will have passed. There may have been a few reversals in the first hour but during this small zone, many traders will cash out of profitable positions and finish the day while others will position themselves for the next move in the market. I look at this period as a time for consolidation and preparation. The move following this day trading time zone can last until lunchtime.
Final Move of the Morning - 10:30am to 11:15am
This time zone will be the final major time zone as far as morning trading is concerned. It is safer in relation to the other zones in that technical indicators such as the slow stochastic or RSI will have a more pronounced effect than some of the earlier time zones. Be careful near the end of this range as it leads right into the lunch time hour which can start early or start late. A rule of thumb is that the more volatile the preceding day trading time zones are, the greater the chance that this move will extend further into the 11 o'clock hour.
Go Eat your Lunch!! - 11:15am - 2:15pm
Lunchtime trading can be brutal. False breakouts and choppy sideways moves characterize this time period. If you must trade, trade lightly until you have a good track record of putting on winning trades in this time zone. Also, please let me know how you do it! The risk to reward is very high here. Volume will fall out of the market as floor traders and other institutional traders will take their lunches. Don't let this time zone turn profitable morning trading into a loss.
Back to Business - 2:15pm - 3:00pm
Traders will work their way back into the market during this time frame. For the most part, trends have been established and trading during this timeframe will provide you with opportunities where the use of technical indicators is applicable. Remember, the CME closes at 3pm so you will see a pickup in volume due to some of the bond traders coming into the equity and futures markets.
It's GO Time - 3:00pm - 3:10pm
Bond market closes and bond traders will flood the equities markets; watch for sharp moves in either direction. Moves can be fast and large.
Use Caution & Stay with the Trend - 3:10pm - 3:25pm
During this day trading time zone, use caution as you are approaching the 3:30pm timeframe which tends to produce a reversal or a stall of the prior trend. During this zone, you want to stay with the trend that has been established from the 2:15pm and even 3:00pm timeframe but don't get attached to the positions.
Portfolio Re-balancing - 3:30pm - 4:00pm
I tend to recommend traders not trade during the last half hour of the day. There are many funds and institutions rebalancing their portfolios and it can get a bit tricky. If your day trading, you only have 30 minutes max to get out of your trade and I don't like working under that type of pressure. If your an action junkie or like putting on very short term trades, the volatility is there for you to do so.
Personally, I trade up until about 11:00am to 11:30am. The volatility in the morning fits my trading style. That is key; you need to understand who you are as a trader and trade accordingly.
As you can see, the chart setup or systems that you look at are not the only factor in putting a day trade on. Remember, day trading is not absolute; it is a game of odds. Your job is to put the odds in your favor and by utilizing the different day trading time zones that we have discussed, your trading will become more consistent.
See You At The Top,
Kunal Vakil is the co-founder of mysmp.com (My Stock Market Power) which provides free trading articles to investors. Please visit http://www.mysmp.com/ for more free articles.