Learning the Hard Way
When I first began trading in 2006 I would trade the entire day.
From morning to close I’d be at the computer scalping, trading, and moving shares on anything I could get my hands on.
In fact, it wasn’t unusual for me to trade over a quarter million shares per day on average, on a busy day over a half million shares with ease.
In addition to this being the absolute worst habit I could have developed early in my trading career (over-trading and scalping vs trading systematically with quality over quantity in mind), I found out that 3 years into my trading after a review of some statistics that I would often give back morning profits during lunch (between 11:30am – 12:30pm).
I found through my trading statistics that I was profitable most mornings and most days after 1pm, but I was usually losing over lunch!
In addition to that, I found that I was more likely to lose in the afternoon if I had traded all day without a break.
Statistically I was less probable to make money over lunch so naturally it made sense to stop trading during that time frame.
What I found after I stopped trading over lunch was that I was keeping my morning profits and then compounding them in the afternoon with trades after 1pm when the volume picked back up.
Also, when I had a red morning, I would often come back from lunch refreshed, and make that afternoon trade to get back in the green.
It was a great change for me: less broker fees and more profits… Good stuff!
Why Not Trade Over lunch?
If you have a strategy that is statistically proven to make you money over lunch, of course you should trade it, but generally speaking retail volume goes dies off during lunch and the edge for momentum traders dissipates.
Success rate of breakouts and long setups are much lower over lunch (especially in the small cap space), so I have hard and fast rule: I don’t buy breakouts between 11:30am – 12:30pm.
I do have an exception to this rule. Its rare, but if there is a stock doing major volume (float rotation on a small cap with big squeeze potential), then I will trade over lunch but its not very often.
Some of the best squeeze moves we see are just after 11:30am when the stock is holding, everyone is short, and its doing excessive volume, shorts tend to give up into 11:30am+ and it can initiate a big short squeeze.
I want to be here for those opportunities so if its one of those days I will definitely stay and wait for that long opportunity, but naturally if I sit at my desk all day, I’m more likely to trade over lunch, get mentally exhausted and it reduces performance in the afternoon.
A big thing to consider is the mental exhaustion of watching charts and numbers all day.
The longer you stare at your screens the more likely you might be to get bored, over-trade, make a mistake, or otherwise make poor trading decisions.
Its a fact that as people get tired, we become more tolerant to risk and more likely to gamble or take on more risk than you should and otherwise make mistakes.
Studies have shown that tired gamblers are more likely to bet more and be more risk adverse when tired.
Being tired due to lack of sleep or from playing a game for too long gives similar results: fatigue, poor decision making, more risk adverse, and therefore more likely to lose.
Taking an hour long lunch break gives your brain a rest and most importantly doesn’t allow you to trade when the volume and edge isn’t there.
When are the Best Times to Trade?
For a momentum trader such as myself, the ideal times to trade in my experience are the morning session: 9:30am – 11:30am – this is the morning rush.
I rarely ever trade the first 15-30 mins of the day, I’m always waiting for that first clear low risk setup AFTER we’ve established clear support/resistance areas.
If I take any long setups, I have no problem trailing winning positions after 11:30am but I don’t take new long positions just before lunch.
If statistically setups are more likely to fail during those times, you are more likely to lose during that time frame, and stocks are less likely to make good moves with volume, you simply should not trade them.
As part of my daily trading routine, I always trade the morning session and then take an hour long lunch break when the action slows down.
I like to take that one hour to get outside for some fresh air, eat some healthy food and I come back refreshed and ready to trade the afternoon session.
After 1pm retail traders are back from lunch and I’m looking for low risk afternoon setups that match the criteria of our system.
In closing, if you are trading poorly in the afternoons or losing money / breaking even over lunch, you are probably better off to take the break, refresh, and come back strong after 12:30pm for the afternoon session ready to take on the best setup you can find that matches your criteria and system.
If you don’t have a system or process in your trading, you need one! Please read this blog post for more info.
You can use software like TraderVue to view your trading statistics and see which times of day you are winning or losing and make the necessary adjustments.
Thanks for reading. Trade safe, and trade smart!
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