Trader's day

In this theme we will go through one normal day in trader’s life. I would like to stress out that this article focuses specifically on day trading activities and is prepared for those that are trading on US Equity Markets.
It is general misunderstanding that trader comes to work just before the market opens, makes huge amount of money in a few minutes and then goes home. If it was like this than the number of traders would be probably at least ten times bigger than it is. Let me begin with general time frame and market activity throughout the day.

American equity markets open at 9:30 am ET (Eastern Time) and close at 4:00 pm ET. Time in-between is called trading session. During trading session there are moments with increased activity and then times when the action is very slow. The highest level of market activity and volatility is in the first hour after opening bell. The best advice is not to get involved in trading for the first 10 -15 minutes after the bell. Just sit on your hands and watch the overall action. Stocks need some time to show you the direction they will go, sooner or later it becomes clearer where the buyers and sellers are. Normally experienced traders make around 50 -60 % of their daily profit in this first hour (however, if they are wrong, most of daily losses are produced at this time).

After first hour, around 11:00 am, comes period when activity starts gradually declining, volume goes down; there are less and less trading opportunities. The slowdown varies from stock to stock and it is extremely important to be able to recognize this moment. If you keep trading the same way as you did in the morning, result can be overtrading – getting involved in trades that make no sense. This can happen if you had good morning, made decent money and you just want to keep making the same amount of money all day long. But if you start overtrading you risk that all that you made in the morning will be flushed in the toilet. Being able to recognize the slowdown in market activity is feature that comes only with many months of experience and is crucial for keeping high level of concentration and keeping the money that you made. Patience is a key word here.

The slowdown in activity is getting bigger as the lunchtime approaches. It is quite normal, everybody needs to eat. Risk of overtrading is highest at this time. If you do not watch out, you can easily become a victim of Black Box trading systems that try to lure as many market participants as possible to believe that something is going on, even though there is no money to be made. There are many tricks traders have to be aware of and once again, more experienced you will become, more easily you will recognize these tricks.

Volume and volatility is coming back to markets in around 2:00 pm. Many times the level of volatility in the last hour of trading session can approach the levels from the morning.

There are of course several exceptions that bring increased volatility to a market day even outside these general time frames I just mentioned. One of them is so called “oil number”. Every Wednesday EIA – Energy Information Administration – at 10:30 Eastern Time provides report that concentrates mostly on oil supply. In case expectations were for a higher supply than is the reality, oil sector stocks will move up. And vice versa. This oil number used to be real market mover, but in recent years the moves that follow this report are less violent. Another huge market mover, pretty much the biggest single event that can move the whole market, is FED meeting announcement about FED rate. Every six weeks American Federal Reserve System chairman and presidents meet in order to discuss FED rate – exchange rate between banks. Their decision is announced at given day at 2:15 pm. What you can see after this announcement is probably the biggest volatility you can see in the markets. Moves can reach size of couple points within few minutes, sometimes seconds. Once again I would strongly recommend not to trade in those very first minutes after announcement and if you just started trading, do not trade during this period completely. Just sit and watch what is going on.

Just because the trading session is from 9:30 am to 4:00 pm, it does not mean there are no possibilities to trade outside this time frame. You can do it in so called premarket and aftermarket sessions. Many times companies announce their quarterly earning reports at these times. I would suggest you not to trade at this time because it is very risky with low volume. And if you just began trading, do not trade at this time at all.
 

So how does a normal day in trader‘s life look like?

I would suggest you to get to your computer no later than one hour before the market open. Many websites providing info about the markets are bringing every half an hour market updates. There you can see where the S&P futures vs. fair value is and you can see this as an indication of where the market will open (positive number points to market opening higher, vice versa for negative number). You can also find out what news will have the biggest influence on market that day – it can be earning report from big company, important number like crude oil number every Wednesday at 10:35 am etc. Good information source for these events is Bloomberg and its economic calendar.
After you get general information about the market, it is time to produce your own game plan for the day. Preparing game plan depends on what part of the year it is – earning season or outside the earning season (this applies only to more experienced traders; beginners should always concentrate only on one stock).
 

Outside earning season – more advanced traders normally have basket of stocks that they trade every day – so called bread and butter stocks. They choose to trade these stocks because of their high volatility in the past, because they have decent volume, decent daily ranges etc. (for more look at Stock selection lecture). Checking the charts of these stocks helps them to prepare so called game plan – extremely important tool while preparing for daily market action.
Game plane is generally an Excel sheet with stocks separated through sectors. Comparing premarket price of their stocks and market indication gives them a clear idea which of these stocks will have some extra action – e.g. due to big difference between fair value of market indices and premarket price. They write down at least 3 levels for support and resistance which they find out from the charts in the past couple days, sometimes months and in rare occasions years (if the stock is approaching the levels from few years ago). Also part of good game plan is very short description of what is going on in given stocks that is what are market news about them, what makes them interesting. Because once there are no news about some stock, volume dries out and stock becomes unattractive for trading. Game plan helps you get ready for the market. You can set up your trading strategy while using this simple tool. Trading might seem difficult, in fact it is not. All you have to do is come up with certain set of rules that fit the best to your trading style and follow them. Strict discipline will force you to get out on levels from your game plan instead of waiting for miracle that will turn your loss in a huge profit. Believe me, it happens very rarely.

During earning season – earning season is every quarter of the year when companies whose stocks are being traded on NYSE and NASDAQ provide earnings reports consisting of EPS (earning per share) and Revenue. Earning season lasts 3-4 weeks and is normally accompanied with higher volatility in the market in general and the stocks who release earning report have probably highest level of volatility on these days during whole year. Generally earnings season kicks off with aluminum company Alcoa (ticker AA) earnings announcement.

How to pick the right stock?

Here are few tips that might help you:

• You should have knowledge when concrete companies release earning reports. You can find this out on the web by asking for: "earnings calendar".
• Wall Street analysts are always providing their estimates for EPS and Revenue for every company. If the actual result differs from what was expected than this will bring tremendous volatility to those stocks.
• I would suggest to select stocks with decent volume, stocks that are approaching 52 week highs or lows (highest/lowest price in the last year), stocks that are as a result of earning report (premarket/aftermarket) already above/below 52 week high/low,  stocks that beat or missed earnings estimates in really strong fashion.
• Make a list of two - three stocks that you will watch of the open and select the ones that have the best follow-through after opening bell.
• Make sure you do not overtrade. It is especially important with these earning stocks where increased volatility can last only couple of hours and then they boring as they always were.

After closing bell day of trader is not over. It is important to analyze trades you made during a day. Quite a paradox is that you will spend more time doing research of what went wrong when you lose than when you make money. It should be always part of your day no matter what the final result is. Print the chart, look at what times you got involved in trades and many times you will be surprised that you were trading when there was nothing there. Prepare yourself for the next day. If your bread and butter stock is drying up (meaning becomes more and more difficult to trade) it is time to make some research and try to find new one. Learn chart patterns. Analyze your mistakes. Talk to other traders who trade the same stock. There is always something you can do to improve your trading.

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