It’s time to get ill…(80s reference)
One of the main problems most traders have is discipline. You’ve heard it. You know it. Everyone says it. It’s true. But how do you deal with it? How does one exterminate that psychological beast known as “boredom”? How does one eliminate the urge for “revenge trading” and the desire to instantly recoup the money just lost?
One way to approach the problem is by viewing trading as a job with a set work schedule and staying at work only long enough to get the job done.
Statistically speaking, it is a fact that certain times of day are more volatile than others. For example, many economic number releases happen at 8:30am ET such as the employment data report (non-farm Friday), GDP, CPI, Retail Sales and Durable Goods. On average, these reports create volatility between 8:30am and 9:00am. This doesn’t necessarily mean there will be a ton of great opportunities during that time but there will be movement and movement is needed to make money. The treasury markets usually move quite a bit right after these numbers. Then they slow down and typically don’t do much of anything between 9:00am and 9:30am as people are waiting for the stock markets to open.
The stock markets open at 9:30am. There is usually a flurry of activity at the open and it can sometimes last fifteen minutes or sometimes an hour. It all depends on the day. Treasuries often pick up again during this period and volatility increases if stocks are moving. This is what you want to see when contemplating a trade. What you do not want typically want to see is extremely slow activity with prints going off every thirty seconds instead of every two seconds.
There are certainly days when faster movement does occur sometime between 11:00am and 4:00pm but if you were to watch ten days of action during that time frame, you may only see a few decent situations on three of the ten days. Alternatively, if you watch ten days of action between 8:30am and 9:00am when there is a news release at 8:30am, you will probably see many decent setups on seven of the ten days.
The point is that there are busy times and slow times and it’s usually easier to find good trades when it’s busy. If we know this, then doesn’t it make sense to focus our efforts on the times which are likely to be busy? Strike while the iron is hot, so to speak.
*Note: an obvious exception to this is when conditions get a bit crazy like they did at the end of 2018. During those times, there may very well be extreme volatility all day every day for several weeks but that is not the norm and this post is meant to focus on strategies being used during times of normal volatility.
The other factor at play here is mental focus and endurance. When you wake after a good night’s sleep, you are feeling well and ready to conquer the day. This obviously helps the decision making process. The longer you sit and stare at blinking numbers, the more likely you are to start making errors in judgement. I frequently receive emails from traders who say they often start out on a positive note early but then give it all back plus more as the day progresses or they do not capitalize on early opportunities and then find themselves trying to make money later because they are annoyed with themselves for missing out on the earlier trades. But, of course, they do not make money later. They lose it.
So think about a game plan using this information. Here are some examples.
If you’re trading treasuries, make a plan to trade on news days between 8:30am and 9:00am. Break from 9:00am to 9:30am. Trade from 9:30am to 10:30am. Then assess the action honestly. If you haven’t seen anything you would define as good action in the last 30 minutes and it seem pretty unlikely that you will see good action in the next 30 minutes, call it a day. Come back tomorrow. If the volatility is still great at 10:30am and you can foresee some more good moves in the next 20 minutes, stay and watch but don’t kid yourself on the action. If you’ve not even contemplated taking a trade in the last 40 minutes, chances are the action is not going to improve in the next 40 minutes. Even when stocks move late in the day, the treasuries often do nothing. However, treasuries regularly offer better situations after the 8:30am numbers than the ES.
If you trade stocks and/or stock futures, focus on the 9:30am to 10:30am open. It it’s still moving at 10:30am, keep watching. If not, don’t. Stock are a bit different because they definitely can move in the afternoons so the game plan here is a bit tricky. There’s a part of you that doesn’t want to miss that action and if you are capable of shutting down for a couple hours and then returning for the afternoon and being disciplined and sharp, that’s fine. The problem is that most people are not capable of this. They take a break at 11am. Then they have lunch. The food starts digesting. Nap time is on the horizon except “I have to stay awake because something might happen at 2:30pm.” Nothing is happening. Browse the internet. Read the latest so-called “news”. See ads about abs;) Watch a few minutes of a podcast. Glance at the DOM.
“Hmm. The ES is moving a little. Looks like a play. I think I can scalp an easy 2 ticks.”
Click the mouse and buy. Market instantly ticks lower.
“Wtf? Really? They just bought 800 contracts and now they can’t bid it higher?”
2 ticks against you.
“Now they sell??”
3 ticks against you.
“Are you kidding me??!”
4 ticks against you.
“This is so stupid.”
5…6…7…8…click. Book the loss.
Insert colorful language and mental rage.
If you trade Eurex, maybe contemplate this route: the interest rate products open at 8:00am CET and the Bund often moves between 8:00am and 8:30am. So focus on potential plays in the Bund between 8:00am and 8:30am. Then break till 9:00am. When the Dax, Stoxx and other stock indices get under way at 9:00am, return to the game and focus on that first hour. I have noticed that the Eurex markets tend to have the best movement between 9:00am and 10:00am. I do occasionally see “good” movement between 10:00am and 1:00pm CET but that period is typically slow and I think it’s harder to identify high probability trades during that time. So when trading Eurex products, contemplate focusing intently on the action from 8:00am to 10:00am and then calling it quits…win, lose or draw. The exception to that might be on days when the ECB (European Central Bank) is announcing rate policy. Those days can produce some decent movement which can carryover into the U.S. markets.
These are just samples. The idea is to isolate the time frames that seem to work for your style and then focus only on those periods.
To help solidify this idea, I will share an anecdote. Many years ago I knew a guy who spent several days trading in the same office as a gentlemen named Jim Shaw. Shaw was, back in the day, maybe the largest individual trader in the world. His size was staggering at times and he traded only for himself. His P&L could fluctuate seven figures in an hour or less and that was on a regular basis, not just during big moves or news events. When I asked my friend how he traded, the first thing my friend said was, “He walks through the door at 9:29am and is gone before 12:00pm every day.”
Ultimately, you are still responsible for making the decision to close the trading platform and stop for the day. I realize that is easier said than done. If you trade from home and you have nothing to do for the next five hours, you start thinking that you should just keep trading because, “What else am I going to do?” But that mentality is a killer over time. If you can treat trading as a job which requires you to only work 2 to 3 hours and then you have to clock out due to company policy (you can keep working if you want but you’re not going to get paid for it), you may find it helps the P&L statements.