Learn the Best Times of the Day for the Best Trades

Developing a trading methodology and rigidly following your money management rules represent only part of the struggle in becoming a successful day trader. Equally important as the question of "how" is "when." You may have very proficient trading systems and be able to follow your rules, but understanding when to place trades can take your game to the next level. As an active trader, you need to be aware of these different time zones as some of them may be more prone to generating legitimate breakouts and breakdowns while others may be more conducive to range-bound trading.

I want to cover the market dynamics that occur during the different segments of the trading session. Remember, make the game come to you; do not chase the game. Most trading systems will work better in either trending or range-bound markets, but not both.

The Opening Bell - 9:30am to 9:50am

Exercise caution during this time frame; it is the most volatile trading period of the day. Unless you are an extremely talented day trader, it is best to stay out of the market and wait for the imbalances created from overnight news or earnings releases to settle down. The extreme nature of the volatility renders many technical indicators useless. In most cases, volume will also be the highest of the day during this time, and price swings will make it very difficult to set appropriate stop-loss orders.

The Morning Reversal- 9:50am to 10:10am

The first reversal zone of the day begins at around 9:50am and lasts for about 20 minutes. Day traders need to pay close attention to this time frame; many traders will put on continuation trades, or buy stocks which set new 30-minute highs and short stocks setting new 30-minute lows. Other traders may look to buy stocks that have had small retracements after a large morning gap and short stocks that have had minor retracements off strong gaps to the downside.

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 with the opening 20 minutes but will still be very high during this time. 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. This can especially be the case when an index gaps higher on the open and continues to break to new highs during this time period.

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. Keep a close eye on the time and sales window of the stocks you are tracking and look for an indication of strong buying or selling to help you gauge the direction of the next move.

Which Way Will You Go? - 10:25am to 10:30am

By this time, the markets will be settled for the most part and most of the day's 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. Consolidation and preparation for the next move describe this time period. This 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. This time zone 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 in some of the earlier time zones. Be careful near the end of this range as it leads right into the lunch hour, which can start early or start late. A general 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.

Take a Break & Take Lunch - 11:15am - 2:15pm

Lunchtime trading can be a tough trading environment. False breakouts and choppy sideways moves characterize this time period. If you must trade, tread lightly in this time zone until you develop consistency. Also, please let me know how you do it! The risk-to-reward ratio 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 Work - 2:15pm - 3:00pm

Traders will work their way back into the market during this timeframe. 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 3:00pm so you will see a pickup in volume due to some of the bond traders coming into the equity and futures markets. Keep in mind, a low volatility morning session usually portends low volatility during the afternoon. Stay cautious in this situation.

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 you're 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 do so.

Conclusion

As you can see, the chart setup or systems that you look at are not the only factors 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 using the different day trading time zones, your trading will become more consistent and profitable.

See you at the top.

Kunal Vakil is the co-founder of www.mysmp.com (My Stock Market Power) which provides free trading articles and videos to investors covering a broad range of trading topics. Prior to becoming a full time day trader, Kunal designed bond trading systems for one of the largest secondary mortgage market participants and provided management consulting services to many top financial services companies.