First hour trading strategy

I honestly get visibly frustrated when I hear people giving this advice to new traders. The amount of head fakes and erratic behavior is just over the top. No more panic, no more doubts. Learn About TradingSim For me, a clear profit target is the best way to ensure I take money out of the market consistently.

Strategy: The first hour

Each of these articles will clearly break down the importance of getting in a rhythm of taking profits. The last 20 minutes of the first hour of trading is not the time to hang out and see how things go. This is the time where you need to be on the lookout for closing your position and you must have some idea of where you want to close the position. The key thing is making sure you are coming from a place of wanting to pull profits from the market. Most of you reading this article will say to yourselves, this makes sense.

I should trade during the first hour when I have the greatest opportunity to make a profit since there is the greatest number of participants trading. This is a true statement. You can make money all day. The only problem is the majority of people do not. You will see that around am the volume just dries up in the market.

This is because the institutional investors and hedge funds realize that there is far more work and risk to be had during the middle of the day than potential profits. The resulting price action when the true stock operators are away from their desk is basically a lot of sideways action. Stocks will breakout only to quickly rollover. Stocks will begin to move in one direction with nominal volume for no apparent reason.

I came across this great video from SMB trading where Mike Bellafore describes how some of his traders fight the desire to trade during the slow midday period. Oh, how I wish I had come across an article like this back in the summer of I may still have a few strands of hair on my head.

Think about it, in any line of work, you want to follow the most successful people. You are in the business of making money, not working long hours. So, we at Tradingsim wanted to see if that study would still hold up years later. The first thirty minutes is on average twice the size of the 10 am to am time slot. We did not perform a volatility test on these times, but you can assume where there is that much smoke, there is a fire.

The one thing that was quite alarming is that the last half an hour is just monstrous. This my folks is evidence that if you are trading during the middle of the day, you will likely give yourself a major headache.

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Reason being, you will need to find a needle in a haystack in terms of locating the trades that are going to move in such a dull market environment. If you cannot resist the urge for whatever reason, at least hold off until If you are day trading this presents another dilemma as you should be exiting your trades at 4 pm.

This means you have less than one hour to enter and exit your trade. I do like the idea of having a set time to close the position, but you must yourself if you are really going to stay true to this rule. If there is any chance you could start holding trades overnight as a day trader, then focus on the first hours of trading. There is more than enough action.

While the market open presents the greatest number of trade opportunities, you also need to determine the level of volatility you are willing to trade on the open. While volatility is required to make money, profitable traders have a limit of what they are willing to trade. Reason being, the stock will likely trip my stop loss order before I am able to realize my profit target.

Also, there is a greater chance I will end up in a blowup trade if things go against me swiftly. You can trade volatile stocks, but you need to reduce the amount you invest per trade to limit your risk. If a stock is three times as volatile of your average trades, only use a third of your normal size. The reason I am touching upon these ridiculously volatile stocks is that they are available for you to trade.

You need the discipline to avoid chasing the big win because at some point it will result in the blow-up trade.

However, pre-market data can provide insights into the trading range of a security. Well if you are buying a morning breakout , the pre-market high can be your first target for the price move. Conversely, if a key pre-market support level is breached, you can anticipate the pending move lower. Most platforms provide the ability to include pre-market data on the chart if you look at your chart property settings.

This strategy has been talked about on the TradingSim blog quite a bit, but essentially you are looking for low float stocks that have the potential to make big moves. The other method you can use for trading the morning pre-market data is to wait for the first pullback. This obvious advantage to this approach is that you can lower your risk by purchasing the stock at a lower price.

Now what you will miss by excluding the pre-market data are the trend lines and moving averages that provide support for the pullback. You can in the above chart the clear run-up in the pre-market. Then you can see how the stock broke down below the morning lows only to plummet lower.

You are unable to see the clear range and hence would be operating on a hunch rather than clear patterns in the chart. While I agree there is consistent money to be made, the reality is that morning trading is not for everyone. One thing that morning does not afford you is the ability to ignore stops. Think about the chart of the breakdown above. A Wall Street Journal article touched on the fact the morning has the greatest spread between what buyers and sellers are willing to make a transaction.

If you are trading the morning movers you will need to use 1-minute, 2-minute or 3-minute charts.

The action is so fast 5-minute or minute charts will have you missing the action. Therefore, as the stock is moving in your desired direction, take some money off the table. You will inevitably come to a point in your trading career where you will want to nail tops and bottoms. The reality is you will be chasing a ghost. The morning more than any other time of day is really difficult to call these turning points in the market.

Reason being, again the action is so fast.

So, the best thing you can do is focus on making sure your profit versus what you are risking is always greater and you give the market time to settle. But I strongly caution you against reviewing old trades and only focusing on the biggest winners. This will create a sense of greed inside of you. A better approach is to track the profits and losses on each trade, so you can begin to develop a sense of the averages you can hope to make based on the volatility of the security you are trading. A classic approach you can use is to place your stops below the breakout candle and even this at times can present mid to high single-digit percentage losses.

The other option is to use sub-one-minute charts 30 and second intervals in order to place tighter stops. If you really want to go granular you can use tick charts in order to further manage the price swings [4]. As mentioned earlier, a 5-minute or even 1-minute bar could have you risking a sizeable amount of money. Hopefully, you have found this article useful and it has provided some additional insight into first-hour trading and some basic approaches you can take in your day trading strategies to capitalize on the increased volume in the morning session.