If you are developing a trading system to trade intraday charts you might want to know when are the best times to day trade. This article is aimed at those who enjoy opening and closing a trade within a day. That is, those of you who are day traders that end the day with your trading account flat. We’re going to hit a very basic but necessary edge that just may help you narrow down when you should be trading and when you should step aside. I’m a big believer in knowing when not to trade. Stepping aside and not opening a position can be a great thing for both your account and your sanity. In this article I’m going to show you how to eliminate unproductive times during the day when you probably should not be trading.
As a system developer here are two points I think you should keep in mind particularly if you’re just starting out in system development. The first big obstacle you will have to overcome is slippage and commissions. Both of these can have a dramatic effect on your trading system. These effects can literally take a seemingly winning system and turn it into a loser. Thus, it’s important to assume both slippage and commissions in your backtesting and create a system that generates a safe margin above these two costs. What’s a safe margin? I would say at least $50 per trade. Slippage and commissions don’t matter much when you are trading a rotational system like Ivy Portfolio. Why? Because the cost of both commissions and slippage is tiny compared to the gross profit per trade. On the other hand, with an intraday trading system, one tick of slippage and a $5.00 round trip commission fee is a much bigger percentage of your gross profits that might average $50 per trade. In short, the negative effect of commissions and slippage takes a much bigger percentage of your profits. Most underestimate this negative impact.
The second obstacle is the difficultly level in developing a system on smaller timeframes vs larger timeframes. The smaller the timeframe the more difficult it is to develop a successful system. In other words, developing a system to trade on a 5-minute chart is more difficult than developing a system that trades on a daily bar. There is a lot more noise on the smaller timeframes and given the massive amount of data you would need to test the system over years and years of different data, it can be a very difficult task. However, for those of you that want to take up this challenge, then one of the first tasks you might want to consider is: Is there a particular time of day that could provide me with the best edge?
I created a simple EasyLanguage program that counted the number of ticks a market moves every hour. I did this by simply taking the high of a 60-minute bar and subtracted the low. This gave the range of ticks for that hour. By doing this I was hoping to answer the question, when is the market most actively moving? The premise being, a more active market equals a more tradable market. This may not always be true, but I think it’s a safe assumption that capturing a profit from a market that has a wide range is easier from a market that has a much narrower range.
The two graphs below show the E-mini S&P and the Euro futures markets broken down by the number of ticks they move per hour. In short, you can see both markets have two peeks in activity. First, the European open around 0200 central time and second, the U.S. open around 0830 central time. For the E-Mini S&P market there is also a short burst of volatility two hours before the U.S. close at 1500.
What does this tell us? The assumption I am making is the larger the bar (as seen on the bar graph above) indicates the more range the market moves and thus, I would consider this a more friendly environment to trend following systems. If you are looking to extract ticks from the market with a trend following day trading system, these charts highlight the times with the most range. Another study, which may be a good topic for another article, is to study the intraday price activity based upon the trendiness of the price action. In other words, use a trend strength indicator to test the trendiness of each hour. In previous articles I’ve used trend strength indicators on daily charts, but applying them to intraday charts may be useful as well.
For The E-Mini S&P:
For the Euro Currency:
These results may suggest that focusing your trading activities on these times may be more productive than trading the other times. Why waste a lot of time attempting to extract dollars during the other times which have much lower volatility? Keep your cash and save it for the most productive times to trade. In my experience, knowing when not to trade is a critical skill to have. It could save you from making a lot of mistakes which means saving you a lot of money.
Another idea is during the “slow” times a different trading strategy may be effective. While I like to start building system for the most active trading hours, sometimes a particular system will do better on the less active times. For example, during the midday period for the ES a mean reverting strategy may prove to be better. This was an important discovery when testing various filters when creating the Euro scalping strategy. During that article I discovered the quiet hours really improved the system performance. So, it’s always important to test!
Knowing when to trade your particular system can really play a huge part with improving a system’s performance. So, don’t forget to test various time filters when developing your systems.
Jeff is the founder of System Trader Success - a website and mission to empowering the retail trader with the proper knowledge and tools to become a profitable trader the world of quantitative/automated trading.