When Is The Best Time To Trade?

The best time to trade is entirely dependent on the trading strategy that you are going to use. Some basic rules of thumb are universal to all strategies though and understanding the dynamic of the different times of day is key to knowing when your strategy will perform the best.

Trading the New York Open

The New York open is the same thing as saying the US open. The United States stock market opens at 9:30 am eastern time Monday – Friday. The opening hour of price action is often the most volatile time of the day as markets digest any of the news or movements that took place in the overnight session.

Traders who initiate positions overnight are oftentimes thought of as short term traders with weaker hands who are not as committed to holding their positions for long time periods. Generally they are looking to make very short term profits and close positions at the first sign of danger. Overnight positions can also be thought of as dumb money. Think about it… JP Morgan’s trade desk is not filling an order to buy 100,000 S&P 500 futures contracts in the overnight session. It’s not how they act.

When the market does open that’s when the large funds start executing the market on open orders and filling any client requests. Because of this, there is not only heightened volatility from the overnight traders battling the opening tone of the market, but you also get heightened liquidity.

The dynamics discussed above make the market open the best time of day for short term day traders to execute their trading strategies. There is often enough volatility for substantial moves to take place, paired with enough liquidity to get in and out of positions with minimal slippage. This is a double edged sword though because just like gains can be amplified in the first hour of volatility so can losses. The open is often reserved for traders who are experienced and can handle the emotional rollercoaster of price action associated.

Trading the Lunch Hour

Lunch hour in the US markets is generally thought of as the timeframe between 11:30 am and 1:30 pm eastern time. As Wall Street traders head out of the office to go find lunch, volatility generally slows down as does liquidity. Day traders who made their money in the first hour of the day or so are also starting to wind down and leave the desks to go enjoy the fruits of their labor.

This lunch hour is a great time for traders who want to have more conviction in the morning. If there is follow through from the morning session or a daily chart pattern starts to trigger, this is often a great time to be thinking about those types of trades and entries. Swing trades often require multiple days of movement to hit targets or stops and because of that the lack of volatility during the lunch hour is not a concern. Conversely if you are a scalper, this is not the time to get active as generally the market is not moving substantial ranges.

Trading the Close

The last hour of the trading session is oftentimes referred to as ‘Power Hour’ and experiences just as much volatility and liquidity as the morning session open. For those who have been around a while you’ll also note that the ‘Murder Algo’ usually triggers in the last 10 minutes of the trading day. ‘Murder Algo’ is just an inside joke for the market on close orders that start to get pushed through.

Scalpers can get involved in power hour but there are substantial risks at the end of the day that you need to consider. Obviously when the bell rings at 4pm eastern time, its pencils down, markets are closed for business and it will become difficult or simply impossible to adjust positions in the overnight session. Because of this scalpers trading the close need to think about the risk of overnight carry and whether or not they are willing to hold a position. If there is a news catalyst that is expected to be released before the next day’s market opens, you are at the mercy of the market’s expectations of the release.

Trading News Events

News events are sprinkled into the economic calendar whenever there is major data to update. Every month there are multiple inflation reports, retail sales reports, labor market reports… the list is almost endless. These events will cause volatility, however contrary to popular belief they do not offer high liquidity.

If you observe the depth of market order book ahead of a news release like the CPI inflation report, what you’ll find is that traders and market makers pull their orders from the book, leaving a lack of liquidity, and anyone trying to execute around the initial release of the news is subject to massive amounts of slippage as there is no guarantee of where the order might get filled.

It’s generally not a great time to get involved in any type of trading strategy. Scalpers get hurt due to the lack of liquidity, and the uncertainty of direction is not a great recipe for those looking to employ a swing trade strategy.

Conclusion

For the most part, a majority of day trading activity happens in the morning session as we are coming into a new trading day and potentially correcting any of the imbalances that were created in the overnight session from weak handed traders. If your trading strategy requires lots of volatility and liquidity this is likely going to be when you can best execute that strategy. For those who like a bit more of a mellow market environment, trading the lunch hour is often a better fit.