One of the things why day trading for a living has a strong appeal for many people is the fact that you can do it anytime and anywhere, without a manager or boss breathing down your neck.
You can trade from home or even while traveling, thanks to advances in technology.
And, in addition to setting your own hours, day trading offers individuals numerous benefits they will not enjoy in the more traditional forms of trading stocks and other financial securities. The list is endless.
By definition, day trading is the buying and selling of securities, such as stocks, futures, options, and currencies, within the same day with the goal of profiting from the difference between the buying price and the selling price. No position, short or long, is held overnight.
Day traders take positions based upon their analysis of a stock’s probable price direction within the trading period.
They try to take advantage of small price movements in highly liquid securities by buying low and selling high in a very compressed window of time.
In this article, we will take a look at why morning is the best time to trade for day traders and the tips you need to remember.
If you have been day trading stocks for a while, you might have noticed that buying and selling by individual traders is especially heavy in the first minutes after the market opens in the U.S. at 9:30 a.m. ET.
This is when the bulk of activity takes place because there is usually some major news events and surprise press releases flowing in and affecting stock prices.
Why morning trading is the best time
Stock-trading volume and liquidity tend to be clustered between 9:30 a.m. and 10:30 a.m. Volume measures the number of shares of a stock that are traded on a stock exchange in a period of time, while liquidity is being able to find a counterparty for every transaction.
Day traders frequently rely on trading volume and liquidity to recognize the appropriate patterns and make quick profits. Volume tends to go wild first thing in the morning because of all the news that is released ahead of the opening bell.
As you can see in the 5 min chart of the $SPY below, volume is greatest in the morning, dies out through midday and picks back up again before the close. This is a typical pattern you will see throughout stocks.
It is also important because it can help traders confirm trend directions, identify momentum in stocks, and get in and out of positions.
According to trading data compiled by Credit Suisse, more than 13% of all trading volumes took place between 9:30 a.m. and 10 a.m. in 2014, a figure that has held steady for the past ten years.
The data shows that the opening 10 minutes accounted for nearly 5% of volumes.
Day trading succeeds when you capture price movement and volatile stocks provide that. Volatility refers to the fluctuation of a stock’s price over a given period of time and it varies greatly at each time of the day.
Highly volatile stocks hit new lows and highs quickly, can move erratically, and have dramatic falls and rapid increases.
Markets are most volatile at the opening hours because of the news that has come out while markets are closed as well as orders placed by traders that go live when markets open.
It is also when most traders will be buying and selling stocks, so this is often the most volatile and active period for day trading.
More predictable moves
When there is more volume in a stock, trade setups and patterns tend to be more predictable and have more follow through. This creates better opportunities with more favorable risk/reward ratios.
Morning Trading Tips
Here are a few things to keep in mind while you are day trading in the morning:
- Don’t get emotionally attached to any particular stock. Day trading is all about looking at patterns to determine when you can best enter and exit to make a profit or bring down your losses.
- Keep up to date on the news. You don’t need to be glued to your TV. Just know how the economic calendar looks like and when earnings season is to help you find potentials for your trading day.
- Make use of the 1-minute, 2-minute, or the 3-minute charts, since the action is usually fast in the morning.
- Place hard stops to avoid large losses
- Avoid market orders, use only limit orders.
What about other times of the day?
The toughest time to day trade is lunchtime, between 11:00 a.m. ET and 2:00 p.m. ET. This is when the market starts trading slower because everyone is having lunch. The afternoon is not an ideal time to find good setups because they can fall apart quickly. It is pretty dull, and not a recommended time to trade.
Evening hours can be volatile too as traders look to close positions from the day or open new ones for the following day. This time can provide opportunities but if you already made money from the morning it’s usually not best to risk losing it in the afternoon.
Pre-market and after-hours sessions
The pre-market session from 4:00 a.m. to 9:30 a.m. ET while the after-hours market trades from 4:00 p.m. to 8:00 p.m. ET. These sessions generally have more volatility, lower volume, and less liquidity than the normal trading session.
This can have a huge effect on the price with large, unexpected moves. These times are not recommended for new traders as big losses can happen quickly.
If you are looking to day trade stocks, the best time to do that may be in the morning, right after the market opens at 9:30 a.m. ET until about 11 a.m. ET. It’s when you will end up seeing the bulk of your gains.
So, this means you need to get up early and do your research before the start of the regular trading session.
Huge moves with the biggest potential gains in a short period tend to come between 9:30 a.m. ET and 10:30 a.m. ET.
Many professional day traders stop trading around 11:30 a.m. ET because that is about when volume and volatility start to dry up.