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.

Less is More

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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