Trading Efficiently – The 2 to 3 Hour Trader

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Trading Efficiently – The 2 to 3 Hour Trader

Day trading stocks for years I found I always traded best in the morning, then usually gave some profits away in the afternoon, only to make some back at the close to basically finish up where I was at in the morning. It took me years to realize that trading all day is not a very efficient strategy for a day trader.

Now, trading forex and futures, I finally am able to trade efficiently, as well as retain my mental edge. There are highly profitable times–times where are conditions are ripe for extracting a profit–and low profitability times, and I only trade during the former.

I recommend only trading during the few hour span in which your strategies are most profitable, whether you trade futures, forex, stocks or commodities. My strategies work best in volatile conditions with lots of movement and trends, therefore, my discussion below will focus on these times. The best times for you to trade may vary, but I still recommended that you don’t trade the whole day.

There are two reasons for this.

  • Efficiency: By only trading the two to three most volatile (and potentially profitable) hours of the day I get much better use of your time. While I may make a bit more if I trade all day, the amount I am likely to make is on a decreasing scale.

I trade forex for about one hour a day, from about 8:00 EST to 9:00 EST. During this time I can usually extract about 15 to 20 pips if there is some good movement over one to four trades. After this, trades generally begin to take a bit longer and solid opportunities take longer to materialize. True, some days I could make much more I traded all day, but other days I would end up losing what I had already made.

On average, I find it best to simply trade that hour or so and call it quits. If I was to trade for 6 hours I may end up, on average, making 30 pips for the day. That is much less efficient though; the first 20 pips comes in an hour, while the next 10 pips takes 5 hours, since my strategies generally do worse as the trends die out as the day progresses.

  • Mental Capital: Your most important trading tool is your brain, and your ability to stay calm, disciplined and focused. After a couple hours of staring intently at my screen, I need a break. If I don’t take one I am prone to start making mistakes. It is not only that there is usually two to three hours which have the best opportunities, but after trading those hours your brain is starting to get tired. Focus and discipline may become lost and with it some profits.

If you keep trading after the most volatile hours are over (or your most profitable hours), make sure you are fully alert and not feeling tired. If you are, you’re more likely to make bad decisions.

For these reasons, I have chosen to trade forex for approximately one hour per day around the start of the US forex session. This is one of the most volatile hours of the day, so I get the “most bang for my buck” trading at that time.

I then switch over to futures, and trade the first two hours of the US equity markets. The first two hours are usually the most volatile of the session, providing the most trading opportunities, quickly.

It took time to learn, but less is more. While the strategies you employ may be different than mine, and therefore more profitable at other times of the day, I encourage you to trade efficiently.

Don’t trade all day just because you can. Keep track of your trading stats and see at what times you are most profitable. You’ll likely find a pattern where almost all of the money you make comes within a few hour span, and the rest of the time you are losing, breaking even or barely scratching out a profit.

Trade only during the few hours that are most profitable. By doing so, you’ll also save yourself “mental capital.” The times you do trade you’ll be more focused and disciplined, and you’ll have more time to focus on other endeavours and get fresh for the next trading day.

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Making Sense of Forex Market Hours

When you are starting out trading forex pairs, whether it be in the spot market or using binary options, there is a lot of basic information required. Many traders skip over this basic information, and instead seek out strategies immediately. The forex market is open 24-hours a day because banks/businesses are open at different times around the world, providing liquidity to forex pairs. Yet each hour of the day has different tendencies based on what part of the globe is open for business. Understand forex market hours, and hourly tendencies, and you’ll be better able to apply your strategies at opportune times.

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Forex Market Sessions

Major markets are open at different times throughout the day. Which market(s) is open directly affects the liquidity and volatility and forex pairs.

The EURUSD for example is most liquid and volatile during the London and New York sessions, especially during the “overlap” period when London and New York are both trading.

The USDJPY typically has the most volatility when Tokyo first opens, and when New York opens many hours later.

Currencies generally see increased liquidity when one or more markets that actively trade, or use, that currency are open for business.

Here are the forex sessions based on different time zones:

Figure 1. GMT

Figure 2. EST (New York)

These charts do not show every market in the world, although these are the major ones. The Canadian market is open while New York is open, and London overlaps with other European markets.

Germany opens one hour before London; therefore, some consider that to be the open, and not the start of the London session. Volatility, on average, doesn’t see a marked increased until London opens though.

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Those major sessions directly impact currency pair volatility. The charts below show hourly volatility. If your strategy is based on volatility or you’re using a trending strategy, focus on times of day where the price moves are largest. The “spikes on the chart” are ideal times, as the price needs to be making higher highs or lower lows in order for volatility to increase during that time (see: Trading Efficiently – The 2 to 3 Hour Trader).

If you are using more of a range trading strategy, or prefer low volatility, trade during the sedate times, where the charts show decreased hourly volatility.

All figures below are current as of January 9, 2020. While subject to change, the charts provide a good overall context for relative intra-day volatility.

Figure 3.

8 to 17 GMT provide the best trending opportunities, with 13 to 17 generally providing the biggest moves.

Those seeking reduced volatility, or times more likely to quietly range, trade between 20 and 5 GMT.

The USDCHF is very similar to the EURUSD in terms of its hourly volatility structure, although the USDCHF moves less overall each day and therefore overall hourly volatility is several pips less.

Figure 4.

Figure 5.

Figure 6.

The NZDUSD has very similar hourly volatility to the AUDUSD, and they both move roughly the same amount each day.

Currently updated volatility charts and other forex statistics are available at Daily Forex Stats.

Learning the basics, such as what the market sessions and hours mean to you as a trader, can significantly help in determining what strategies to exercise and when. No matter what time frame you trade on, you should have a checklist which helps you determine what type of market environment you are trading in. This will also help with filtering trades and capitalizing on good opportunities.

The Most Profitable Hours to Trade Stocks

The highest profit potential in stocks occurs over two hours each day.

Duncan Smith/Photodisc/Getty Images

The time of day at which you trade stocks can drastically affect your profitability, since each hour of the trading day has a particular tendency. By trading only the most active hours of the day and utilizing a strategy designed to profit from volatility — such as one focused on short-term trends — you’re trading efficiently. Your time commitment is limited to only the hours with the greatest profit potential, giving you the rest of day to focus on other endeavors.

Volatility

Volatility is a nasty word to investors, but to short-term traders it means profit potential. As a short-term trader, profits should come quickly, otherwise capital is not being utilized effectively. Volatility is the variance in price over a particular time period. The greater the volatility the more opportunity you have to enter and exit positions quickly, hopefully with a profit. Two hours of the day have a tendency to be more volatile than others.

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