The Five Parts of the Trading Day

For traders, it’s prudent to segment the trading day into five parts, each with its own characteristics and conditions. This becomes evident when a high-probability trading pattern plays out perfectly in the morning period, but the exact same set-up completely unravels in the afternoon period. This is a familiar and frustrating situation for traders that made relatively easy profits in the morning, only to give them back the rest of the day and then some. The market literally loves to give a quarter in the morning knowing it will get a dollar back by the end of the day. Each part of the trading day has nuances that traders should be aware of.

 

Pre-Market Period: 4am to 9:30am EST

While ECN trading commences as early at 4am EST, its completely contingent on your broker as to whether you have direct access to trading available at 4am. Due to the lack of liquidity as indicated with very wide spreads and lack of volume, there’s very little reason to consider making trades prior to  8am EST, where most platforms enable pre-market trading to commence. Unless there is a very large gap in the S&P 500 futures, most stocks generally remain thinly traded until the opening bell. The exceptions would be stocks that are exhibiting large gaps up (gappers) or gaps down (dumpers) reacting to some fundamental catalyst (IE:  earnings guidance, clinical trial results/FDA rulings, executive changes). This is the period to prepare for the trading day especially for trading earnings gappers and dumpers and allay a full view of the playing field and construct your trading game plan for your watch list and accompanying sympathy/laggard stocks.

Morning Period: 9:30am to 11:30am EST

This is hands down the most bountiful period of the trading day due to the highest number of market participants providing momentum, liquidity, and volume from the opening bell. The algorithms (algos) often leapfrog each other with sweeps to steal liquidity resulting in rapid and sloppy price moves that overshoot price inflection levels. Skilled and agile traders can have a field day scalping reversions at these levels for quick profits. This is where the market will give you the proverbial quarter, knowing it will get a dollar back at the end of the day. It’s important to avoid impulse trades. Pay attention to the three reactions on earnings gappers. First 20-minutes for the first reaction and second reaction and then the third reaction by 10am EST. Ultimately that volume dissipates as time goes by and taking liquidity with it until the deadzone period. It’s important not to set caught in a “slow grind” where a stock continues remain elevated about the 80-band stochastic continuing to make higher highs prompting a short-squeeze and vice versa on downtrends. Be quick to take your stops. If you get stopped out more than three times in a row, considering moving to another watch list stock. Most intraday traders should call it quits after this period because it only gets tougher from here.

Deadzone Period: 11:30am to 1:30am EST

Most market participants step off at this point, leaving the algos to reign supreme. This is the thinnest volume and liquidity period of the day. Newbies should make it a habit of staying out of these periods, especially if profits were made earlier. This is where traders can get trapped in slow grinds or get stopped out constantly as frustration builds. It is best to use this period to scan and monitor candidates moving on fresh intraday catalysts and research potential post-market earnings reporting stocks. The light volume can camouflage and distort chart patterns so take much of the action with a grain of salt.

Afternoon Period: 1:30am to 4pm EST

Traders return from lunch and resume working institutional orders. While volume tends to improve after 2pm EST, the probability of earlier successful pattern set-ups can often fade as participants including algos are well prepared. The name of the game is to trap the most participants on the wrong side. This is where things can get very tricky, what worked in the morning may not work in the afternoon period. Seasoned traders will keep sizing limited in anticipation of surprise rug pulls and sweeps. This is where the market wants that quarter back with heavy interest. Earnings gappers and dumper tend to get rising volume in the last hour. This period is just the icing on the cake only. The main meal should have been taken during the morning period. If you fell into the red during the morning, don’t try to hard to get back to green as that’s what the market is hoping for. The second highest volume of the day tends to occur in the final 20-minutes, however, actual price range movement can often be locked in a small range.

Post-Market Period: 4-8pm EST

The regular trading session ends at 4pm EST. Usually, there is no reason to trade this session due to the thin liquidity and wide spreads. However, during earnings season, companies with earnings reports can see sizeable and rapid price action. Not all earnings will get a reaction nor even he tradeable due to the ridiculous spreads. The most widely held top-tier companies in the S&P 500 tend to provide the most liquidity and volume post-market. Earnings report reactions tend to start with a jolt up or down, then a reversion, then a trend ala three reactions. The magnitude of the move is the differential. Share sizes should be small. If a stock tanks on earnings, it tends to make an initial bottom going into the 5pm EST conference call. From there it may resume selling off, reverse or plateau until the morning. By 6pm EST, volume and liquidity thin out again as this is the cut-off for many trading platforms. Even the most liquid stocks will slow down after this point until the final 30-minutes before the 8pm EST post-market closing time. The post-market period is a good time to watch for gapper dumper stocks to research in the morning. The key to successful navigation of the trading day is proper pacing. As a rule, walking away after trading the morning period is the best way to pickpocket the market, rather than get pickpocketed.