Knowing when to trade is critical for your success as a day trader. The stock market behaves very differently in the morning vs the middle of the day and the end of the day. You need to know the different characteristics of each part of the trading day in order to find the high probability setups. Let’s talk about the characteristics of each part of the trading day:
Morning trading is the wild west. It is the most volatile time of day, and where the most volume is present in momentum stocks. From the market open at 9:30am-11am is a period of price discovery. The market has just opened and traders are reacting to stocks gapping up or gapping down, usually with some type of news catalyst. This is my favorite part of the trading day as a day trader.
Momentum stocks will be trading with very large ranges at this time of the trading day. This means you have the potential make huge percentage gains in a short period of time. But this also means you can lose a lot of money in a short period of time if you do not have proper risk management. It is crucial to take your profits as well when you have a decent-sized gain, as stocks can quickly reverse on you and your position will turn into a loss.
Mid Day trading is very different from morning trading. At around 11am, most stocks trade with much less volume than at the open, and their ranges tighten up. There are specific patterns and setups that work much better in the midday than in the morning (one of these setups is the VWAP pullback). The follow-through on breakouts and breakdowns tends to be much worse this time of day. For the most part, this time of day is worth avoiding if you are a day trader.
I personally prefer to just trade the morning, and then avoid the midday chop. The midday is the worst time to try to revenge trade. If you are red in the morning, the midday is not the time to make the money back. More often than not you will just finish the day even more in the red. Instead, use the time to study what went wrong in the morning, and plan a strategy to make money the next trading day.
End of Day Trading
You start to see momentum stocks break out of their midday ranges at around 2PM or 3PM. At this time of day you start to see more volume and range come back into most stocks. Most day traders will be exiting their positions at this time, to avoid the risk of holding overnight. This results in a lot of volume coming into stocks and can cause big moves as they exit positions for a profit or loss.
You will also get volume coming in from trades who are buying thinking the stock will gap up the next day. The follow-through is not quite as good as the morning, but you can still get some nice moves if they are breaking out of a long period of consolidation. You will often see short squeezes at the end of the day on momentum stocks as shorts get bought in buy their broker, and they look to avoid paying overnight fees for their borrowed shares.
Pre-Market & After-Hours Trading
Pre-market trading starts at around 5AM EST and ends when the market opens at 9:30AM. After-hours trading starts at 4PM when the market closes, and goes until 8PM. New traders should not be trading outside of market hours. Liquidity significantly drops off, making it much more difficult to enter and exit positions with size.
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