Here’s an extensive guide on how to day trade stocks in two hours or less, including how to find stocks to day trade, when to day trade, strategies you can use to profit, staying focused and how to work your orders.
As a day trader you’ll see the most return, per hour, if you trade for one to three hours. For example, you may make $1000 trading for two hours, and $1300 trading for 5 hours. You may make more trading all day, but your return per hour is likely less (see How Much Day Traders Can Make).
The methods and strategies you’re about to learn can be used for trading all day, although only trading for two hours or less is recommended. The reason why, and how to day trade stocks, is discussed below.
Here’s How to Day Trade Stocks, But It Won’t Be Easy
The opening bell just rang and some pre-market gainers continue to fly higher on increased volume. You buy a few hundred shares and happily watch in amazement as the price flies higher. Three minutes later you’re showing a $350 profit, and the stock continues to move up. “This is so easy!”
Before you start planning your retirement, look at a bunch of different price charts. They move all over the place, so by luck alone you’re bound to have a profit on your screen occasionally. It’s how you handle winning and losing trades that matters, because both will happen, a lot.
Before you start day trading stocks, have a trading plan. A trading plan is an outline for how you’ll trade. It includes your strategies, when you will trade, what you will trade, how much you can risk per trade, and any personal guidelines you may wish to impose on yourself (such as maximum daily losses or loss from top limits). If you’re new to trading you likely don’t have a trading plan; if that’s the case this article is packed with guidelines you can use to start building your plan.
If you’re serious about day trading stocks, and put in time and effort–practicing diligently and honing your technique–making a living from day trading is within grasp. Only about 4% of men (woman, you tend to have a much higher success rate) will generate consistent monthly income though. And it takes about six months to a year of hard work before you start seeing those consistent profits (which may be negligible in the first year)…and only IF you treat your trading and practice like a business.
Consistently profitable day trading is not a destination. You don’t become profitable and then get to relax. Each day demands focus to follow your trading plan. If you don’t, you’re cast out of the winner’s circle. Let your mind lapse and discipline wane, and the market will give you a reality check.
Focus on implementing a winning plan–that you’ve practiced and honed–and you should be able to turn a profit at least 15 days out of a 20 to 23 trading day per month. Some days the market won’t align with the strategies you use or the ones discussed below. Expect to lose on some days each month; there isn’t anything you can do about it. Change your strategy and you’ll still lose some days. What you can do is limit your daily losses, so losing days don’t hurt you. If your losing days are about the same as your average winning day, and you have 15+ winning days a month, you’ll do very well.
Best Times to Day Trade The Stock Market
The best time to day trade the stock market is the first hour after the open, from 9:30 AM EST to 10:30 AM EST.
I also like trading in the pre-market. From 9:00 to 9:30 AM EST. Even if you don’t take any trades during this time, be at your computer watching your stocks. It gives insight into how the markets are shaping up for the open, major biases in the trend, and which stocks are moving (if you opt to trade big movers–finding stocks is discussed next). At the open be ready to go. Trades can happen in a split second and you need to be on your game, not just logging in.
That’s my preferred window of time, from 9:00 to 10:30 AM. I know many day traders who only trade during that time slot and make their entire income from it. For many the window is even smaller: 9:20 to 10 AM, for example. If you just trade the open, trade for 30 mins to 90 mins, that’s it. More is not necessarily better. If do have a bit more time, and you can maintain your focus and discipline, trade up till about 11 AM EST. After that, the market typically gets much quieter and there are fewer opportunities.
The last hour, 3 PM to 4 PM EST is also a popular time for day traders. I recommend just trading around the open, but if you decide to trade another part of the day, trade the last hour, and ideally only the last 30 to 45 minutes.
Through tracking my hourly stats for years, the open and close give you biggest bang for your buck. The middle hours of the day are typically when profits are eroded, or minimal.
How to Find Stocks to Day Trade
Find stocks to day trade in one of three ways:
1. Trade the same stock(s) all the time. Have one, two, or possibly three stocks you become an expert in. Trade only those stocks or ETFs and calibrate your strategies to them. You have zero homework, because you always know what you’ll be trading the next day.
Pick stocks that have enough volume so you can freely alter your position size based on volatility [position size is extremely important; read that article to see how many shares you should be trading]. If the stock is volatile one day, take smaller position sizes and trade with slightly larger stop losses and targets. If the stock/ETF is quiet then increase your position to compensate for smaller stop losses and targets (discussed later). That way, you make a decent income regardless of volatility on a particular day.
The most popular day trading ETF is the S&P 500 SPDR (SPY). Day trade that ETF, or another ETF/stock of your choice.
2. Run a stock screener each week to find two to four stocks that provide good volume and volatility, and then trade those all week. Don’t trade stocks that aren’t on your list. On the weekend, run your stock/ETF screener again and find another handful of stocks. You may find you end up trading the same stocks for multiple weeks in a row. If things are going well, stick with what you are trading!
An example of a stock screen is looking for high volatility stocks with moderate to high volume, as discussed in How to Find Volatile Stocks for Day Trading in 20 Minutes or Less. Alter that stock screen to find stocks that suit your methodology. After reading the strategy sections below you’ll have a better idea of the type of stocks you want to trade.
3. Look for stocks to trade each day. Each morning, and throughout the day, look for stocks that are moving big or moving well. This may include doing some homework the night before on stocks that may breakout the next day, or have earnings or news scheduled. It may also involve watching for stocks that are moving big in the pre-market. For this approach you may need a service like Elite Finviz, or another alert service, that gives you real-time data on what is moving and breaking out right now.
Do I Need to Do “Homework” or Watch News Before/During the Trading Day?
Whether your day trading involves homework and research depends on which stock picking method you choose (see above).
No matter which method you choose, you don’t need to watch the business news channel, read analyst options (not even mine), or even be aware of what’s going on in the world. Follow your strategy–or one of the strategies discussed below–and that is it. Practice implementing it. That strategy gives you a profitable edge, watching news doesn’t.
The only news to be aware of is scheduled announcements. Check your economic calendar and earnings calendar each morning. Don’t trade a stock right before an earnings announcement or “high impact” economic data release.
Exit all trades three to five minutes before a scheduled major announcement. Once the data is released there will be a price spike/drop and liquidity (as seen on your Level II screen) will dry up. Only once you see liquidity return, followed by a valid trade setup, should you reenter the stock/ETF.
Day trading stocks in two hours or less requires efficiency. Focus entirely on your strategy (and not news), and don’t gamble (holding trades through a major economic/company announcement). When you gamble you can lose much more than anticipated on a trade; and if you lose big on one trade then it’s going to take a long time to recoup your losses…not very efficient. Instead, stick to high-quality trade setups and take the easy money. Sit on your hands when valid opportunities aren’t present..but don’t get distracted. Stay focused, watching for opportunities.
Day Trading Stocks Between 9:15 AM to 10 AM EST
To get into a lucrative trade quickly after the stock market open we need a method that will get us into a big move whether a trend develops or not. The method that serves both functions is called the Truncated Price Swing Strategy; it’s covered in more detail below.
This strategy is not rule-based. It’s guideline based. In the real world, this setup occurs in different ways. Take time to practice it and learn how to spot the various looks of the setup in a demo account before trading real capital. I prefer using volatile stocks for this strategy, as they offer the biggest moves in the shortest amount of time. I use examples from volatile stocks, yet the same methods can be adapted to less volatile stocks, the concepts are the same.
Usually the first trade will occur within 15 minutes of the market open, often sooner (especially if using tick charts; discussed later).
In regards to the strategies below, a “consolidation” is when the price moves mostly sideways for at least three minutes (three 1-minute price bars). A “consolidation breakout” then is when the price moves outside the consolidation. “Directional bias” is the direction we want to trade in, based on what the price has done (and is doing now). Always know your directional bias, so you know if you’ll be going long or short.
Here’s how the trade sets up:
- First, the price must shoot either up or down, showing a clear bias in direction. If the price seesaws back and forth, move on to another stock on your list. We want a sharp price move at or just after the open (sometimes it may take a few minutes). We’ll call this the “initial wave” for future reference.
- If the stock went up initially from the open price, we only consider a long (buy) if the pullback that follows consolidates above the open price, then breaks that consolidation to the upside.
- If the stock went down initially from the open, we only consider a short (sell) if the pullback that follows consolidates below the open price, then breaks that consolidation to the downside. The chart below is more of an advanced example. You have to look at the overall price action to see that the direction bias is still down even though the price bounced above the prior short-term swing high on the second trade.
As a guideline, I’m looking for the pullback to retrace about 40% to 70% of the initial wave after the open. For example, if the price spikes $1 after the open, I will only consider a consolidation a potential trading opportunity if it occurs $0.40 to $0.70 below the high that was just set. This helps filter out the trades where the price shoots up a $1, pulls back $0.10, consolidates, then drops another $0.10, consolidates, drops again, and so on. This is not a rule though, just a guideline. Weak moves (like a pullback that seems very hesitant) or a chart pattern forming (like a triangle) may cause me to jump in a bit earlier instead of waiting for the 40% to 70% retracement.
I don’t have Fibonacci retracement levels on my chart (I have nothing on my charts, except lines I draw), and I’m not constantly crunching numbers. It’s just an approximation — we want a good-sized pullback relative to the most recent wave.
- If the initial wave is higher, the following pullback won’t always consolidate above the open. Sometimes it will drop below the open. In this case, we now view the direction bias as down, and we wait for a pullback (higher) to consolidate below the high of the initial wave. We go short if the price breaks to the downside of that consolidation.
- If the initial wave is down, the following pullback won’t always consolidate below the open. Sometimes it will rally above the open. In this case, we now view the direction bias as up, and we wait for a pullback (lower) to consolidate above the low of the initial wave. We go long (buy) if the price breaks to the upside of that consolidation.
Basically, with these setups, we are always trading in the same direction as the most recent biggest wave.
If one of these last two scenarios develops, it will take a bit long for us to get a trade signal because more waves have formed It’s also possible that we may have already taken a trade before one of these latter scenarios develops.
- Stop losses: If you go long, place a “worst case” stop loss two cents below the consolidation low. If you go short, place a “worst case” stop loss two cents above the consolidation high. I use the term “worst case” because the only time you let the price hit that stop loss is if you get into a trade and it instantly moves against you, stopping you out and never moving in your favor. If there’s a consolidation within a consolidation (look closely at a couple of the chart examples above)–I typically use the smaller consolidation breakout for my entry and the larger consolidation for my stop loss placement.
- Target: If going long, you may (but not required) place a target at or slightly above the highest price seen after the open. If going short you may (but not required) place a target at or slightly below the lowest price seen after the open. For other ideas on where to place a target, see Daily Range Day Trading Strategy.
- Reward:Risk – Based on the entry, stop loss and target price, your potential reward should always be at least 1.5 times your risk. For example, if risking $0.10, your target should be at least $0.15 away from your entry price. Don’t put the target way above or below the former high/low to make the risk/reward work; determine where all the orders should go, THEN see if the trade is worth taking based on the risk/reward. If the reward is less than 1.5 times the risk, skip the trade.
- Alternative Non-Target (advanced): Since these volatile stocks move so quickly, and change direction in a split second, you want to be in these stocks only for the good time, not a long time. If you have a target sitting there, it’s easy to miss the signals telling you to get out. So what is a signal to get out? Almost anything. Literally. Stay in the trade as long as it’s moving aggressively in your direction; when that aggression stops, get out. You don’t even need to see reversal bars on your chart. Just get out as soon as the price stops moving or the price moves against you.
The alternative non-target method requires more practice. If you’re long, and the price pulls back $0.01 do you get out? What about $0.02? I can’t answer that for you, because every stock is priced differently. It also depends on how much the stock is moving overall. You need to set your own threshold for when you consider the price moving against you, based on current market conditions. Watch and practice. If you can’t get it, stick with placing a target — it works well.
- Factoring in the Pre-Market: Trading at the open is fine, but I recommend sitting at your computer and watching the pre-market heading into the open. If there’s a significant movement before the open, and the price follows that same path after the open, then where the move began in the pre-market is the reference point for our trade setups, not the open price. For example, assume an up-move starts in the pre-market $30, and rises to $31 by the open. After the open the price moves up to $31.20, then pulls back to $30.80. Overall, we should still only be thinking about going long, because the momentum is still on the buyers side (price is up $0.80 overall since pre-market, and has only pulled back $0.40 from the high…up wave is still bigger than the down wave). Only factor in pre-market moves if there is significant volume. If there are very few transactions in the pre-market, then disregard it from your analysis.
Day Trading Stocks Between 10 AM to 11 AM and 3:30 PM to 4 PM EST
Trading during these time periods is more challenging. Use the same method discussed above to trade trends and reversal, but your reference points are no longer as clear. The open no longer matters, and now you’ll have multiple swing highs and lows to monitor, deciding which ones are important and which ones aren’t.
That said, there are likely one or two more trades in each stock, offering nice potential, before 11 AM EST. And there will likely be another one or two trades in each stock between 3:30 and 4 PM.
By about 10 AM EST trends may start to develop (this is often a reversal time: see Common Intraday Stock Market Patterns). A downtrend is when the price makes consecutive lower swing highs and lower swing lows. An uptrend is when the price makes consecutive higher swing highs and higher swing lows.
- If the trend is down, only consider a short trade if the price made a lower swing low, pulls back, and consolidates below the prior swing high. Once again, I prefer to take trades when the consolidation occurs at about a 40% to 70% retracement of the prior down move.
- If the trend is up, only consider a long trade if the price made a higher swing high, pulls back, and consolidates above the prior swing low. Once again, I prefer to take trades when the consolidation occurs at about a 40% to 70% retracement of the prior up move. The example below is more advanced because the price doesn’t retrace 40% of the prior wave higher. Instead, we get a little pullback (near 10:15), then a bounce, then another pullback and consolidation (our trade). Since the price stalled at the same area it did on the last pullback, that’s enough evidence for me to get in if a valid setup occurs (and it does).
- Stop loss placement: for longs, it goes two cents below the consolidation low. For shorts, it goes two cents above the consolidation high.
- Target: Unlike just after the open, volatility is usually declining by this point. Use a fixed ratio target that gets you out near the former swing low if going short, or near a former swing high if going long. This ratio should be at least 1.5 times your risk. For instance, if risking $0.10 on a short trade (difference between entry and stop loss) your target should be $0.15 below the entry price. That means the entry point should be $0.15 or more above the prior swing low. If the prior swing low is only $0.10 away from the entry price, skip the trade. The price would have to move beyond the prior low to fill the target, and I prefer not just assuming that will happen.
Other Considerations Before Day Trading This Strategy
Trading is as much about taking valid trades as it is avoiding low probability trades. Not every signal you get is a stock worth taking. Here’s where knowing a little bit more about technical analysis helps.
What I like about my method above is that you have time to watch price waves unfold before acting. Say the price shoots higher after the open. Then it pulls back a little (but not 40% to 70%, so there is no trade for us) then rallies, but doesn’t make it to the prior higher, or reaches the same level (double top) or barely surpasses it. The pullback that follows drops a bit lower than the prior pullback (but again, not far enough to signal a trade) and rallies again. It then does the same thing again–it can’t create a strong new high. That’s a potential warning signal that buying momentum is already stalling out. If the price pulls back into our trade area and consolidates, do you take the trade? The price just tried to move higher two more times and couldn’t. So if you take a long, you need to be aware of that. If the price action is showing buyers are getting weak, you may opt to avoid the trade, or you may still take the long trade, but at absolutely any sign of trouble you get out.
New price action is constantly revealed. If you’re waiting for a trade to reach the approximate trade area, but the price action which brings the stock to the trade area isn’t encouraging, re-think the trade.
Results will vary from trader to trader based on which trades they opt to take, and which ones they opt to avoid.
Read Analyzing Price Action: Velocity and Magnitude to help determine which trades to take. Favor trades with sharp and big movements in the trending direction, and where the pullbacks are slow and choppy. This shows that movement against the trend is hesitant, and the trend is more likely to continue. Avoid trades where the pullbacks are very sharp, as this is equivalent to “catching a falling a knife.” The trade has a lower probability of success, since the sharp move against the trend shows the trend may be reversing or at minimum is severely weakened.
Waiting for a three-minute consolidation to form is recommended when you are starting out. It will keep you from getting into a lot of bad trades. In fast-moving market conditions the price may not stay in one place for three minutes; it might only stay there for two. Once you’re profitable with the 3-minute consolidation, consider taking trades where the consolidation is only two minutes. Waiting for three minutes though, in most cases, works well.
A lot can happen inside one minute. I prefer the use of tick charts instead of one-minute charts. Since a tick bar is created every 200 or 500 ticks (whatever you set it to) you get a feel for how quickly orders are coming in, and also get to see the price movement in more detail. The main drawback is that if you trade lots of different stocks with different volume, you may need to adjust your tick charts for each (with a lower volume stock you may want a 100 tick chart, and with a higher volume stock a 1000 tick chart). Since tick chart settings vary by stock/ETF, the strategy becomes more subjective. No longer is a pause of three bars relevant. Rather you’ll be looking for a pause on the tick chart, along with other factors that tell you NOW is the time to get in.
Here is a look at a 800-tick chart (each bar is 800 transactions) of the S&P 500 VIX Short-Term Futures ETN (VXX) on a volatile day. It shows all the subtle shifts in momentum that aren’t present on the 1-minute chart shown below it. This was a very high volume day though. On lower volatility days you may need to drop to a 500-tick chart, or even 200-tick chart, to get the same “resolution.”
Below is a 1-minute chart of the same day. Notice how the 1-minute shows less information. The tick chart allows you to prepare for trades a bit more, as you can see them setting up before you can on the 1-minute.
You may notice a few strange things though.
The first is that the tick chart doesn’t have a uniform time scale. That’s because a bar only forms every 800 ticks (in this case), which could take 5 seconds or 20 minutes, depending on how many transactions are going through. This leads to another weird thing you may notice. When there is very little volume in the pre-market, the 1-minute chart appears to show more data. It shows some see-saws back and forth before the big move higher. The tick chart just shows the big move higher. That’s because all those little 1-minute bars had very few transactions occurring in them; so they equated to only a couple 800 tick bars. I actually like that. When very few bars are forming on my tick chart, it means very few transactions are going through, and therefore, I’m better off waiting on the sidelines for more volume to come into the market…like it did as we approached the open (to be expected).
There is no right or wrong here, but I do find that tick charts help me see subtle changes in the market that a 1-minute chart sometimes doesn’t show. The tick chart also helps me see when there’s little activity (no new tick bars forming), even though the 1-minute chart may still be moving around (but with very few transactions).
Placing Day Trading Orders for Stocks in the Real World
In the strategies above I’ve outlined where to place entries, stop losses and targets.
Stop losses should be market orders — as soon as the stop loss price level is touched the stop order is executed and takes whatever price it can get. Market orders shouldn’t scare you. If you’re trading a stock or ETF where you’re worried that slippage could be severe, don’t trade that stock or ETF. Minor slippage is part of trading, will happen occasionally and really shouldn’t affect overall profitability.
A target is a live order where your shares are visible to the market. If you’re long (bought) 500 shares, there will be 500 shares to sell posted on the Level II at your target price (if you place a target).
If you have to manually exit a winning or losing trade, before it reaches your target or stop loss, it becomes more complicated. Because the price is starting to shift against you, you’ll need to take whatever liquidity you can find. If you’re trading an ETF like the S&P 500 SPDR (SPY) that shouldn’t be a problem, just exit immediately as there will be liquidity at the current level (the current level may change rapidly though). If things look like they could turn ugly, get out…NOW, taking whatever liquidity you can get. If the price is slowly moving against you, you can likely get out on a minor fluctuation in your favor (or at the bid or offer, which ever results in a better price for you). Subtle changes in how you act under these circumstances make a difference in your daily, weekly and monthly returns.
The entry also requires a bit of finesse. The strategies above said to enter long when the price breaks above the consolidation, or enter short when the price breaks below the consolidation. Typically this will be a one or two cents outside the consolidation. Keep in mind though, there are a limited number shares. Watch the Level II and takes shares when you can, this may mean causing the breakout yourself if there isn’t much liquidity showing on the levels. It may also mean taking shares three or four cents outside the consolidation, but only if the potential reward justifies the slightly worse price. In other words, just setting an order often isn’t good enough. You need to be on your toes, and paying attention to what is happening in the stock.
The Final Word on How to Day Trade Stocks
This method for day trading stocks is subjective; the consolidation I see as a trading opportunity, you may not.
This method also requires practice; a lot of it. Moves happen so fast that you need to be planning your trades before they even occur.
That is how to day trade the stock market in two hours or less. Practice in a demo account until profitable. Realize though that when you switch to live trading you’ll face another learning curve. Your orders have an effect on the market, which they didn’t in the demo. Shares are limited at good prices, and in the demo account usually they aren’t. Ease into it. Start trading with 100 shares, even if you can afford more, and build up slowly to risking 1% per trade (or whatever risk limit you set for yourself).
By Cory Mitchell, CMT