July 12, 2019
The Best Time of Day for Trading
What is the best time of day for trading? Most traders choose what time of day they will be following the markets based on one of three possible factors:
- The available hours they have after work and other commitments.
- The markets that are open at that specific time of day.
- Traditional ‘working day’ hours, such as 9 to 5.
However, there are other considerations that we must make if we want to hit peak performance with our trading. In fact, if you get it wrong you may see your performance drop by as much as 20%, as you will find out later.
The key points you will learn in this article are:
- Which times of day are best for you to perform certain types of activities.
- How to improve your cognitive ability during your worst time of day.
- A brief overview of the science behind these factors.
Our Circadian Rhythm
Our cognitive ability to a large extent is dictated by our circadian rhythm, otherwise known as our body clock. These circadian rhythms take place within the cells of each individual organ inside our bodies, but there is also an overall ‘master’ pacemaker: the Suprachiasmatic Nucleus (SCN).
The SCN is a cluster of around 200,000 cells located in the hypothalamus and is approximately the size of a grain of rice. It controls the rise and fall in our body temperature, regulates our hormones and it helps us to sleep at night and wake up in the morning.
The cycle that the SCN runs on is 24 hours and 11 minutes. Since this is more than a typical day, the body aligns itself with social and environmental signals to match the internal cycle of your body clock with the external cycle of night and day. This process is known as entrainment. In some situations, if your sleeping pattern is really bad, your body will struggle with entrainment and you’ll find it difficult to match your body clock with daylight or darkness.
This circadian rhythm leads us to go through different levels of energy throughout the day. Typically, this will mean most people go through a cycle of a peak, followed by a trough and then a recovery phase.
The peak will usually happen in the morning after waking up, until about lunchtime. At this point, we enter a trough, which lasts until early evening. This is the typical afternoon slump where you feel tired and sluggish. In the evening, we begin to hit a recovery phase and our energy levels pick up again
With trading or any other type of daily work, most people will follow a normal working day along the lines of 9am to 5pm. However, this means working during the afternoon slump, which Is not optimal.
Since most people experience their ‘peak’ in the morning, they would assume that this is the best time of day to complete any activities. But this is not necessarily the case, as it will largely depend on the type of work you are doing and the type of person you are.
When we wake up, our body temperature slowly rises. As it does this, the increasing temperature starts to boost our energy levels and alertness. This leads to some of our abilities being tuned in and enhanced.
In this morning session, your executive functioning, powers of deduction and ability to concentrate are improved. At this point, most of us will find our analytical qualities maximised. These will usually peak in the late morning (or early lunchtime). Therefore, this is the best time to perform analysis or any other activity that requires discipline and full concentration, such as trading.
This time of day is also when our vigilance is at its best. This is especially important for traders, as it will help us to stick with a system better and not deviate from our rules. Our mind is the bouncer on the door of the club, turning away any irrelevant information.
It also happens to be the time of day that we are most positive. Since trading is so heavily dependent on having a good mindset, this is a factor we can’t dismiss.
When it gets to around midday, all these morning qualities start to reverse. Our vigilance reaches its limit, which means instead of sticking to the logical and systematic approach that we took during the morning session, we may start to take a turn for the worse. Our decisions are more likely to be influenced by our gut feeling, stereotypes and irrational logic.
Studies have shown that at this time of day our ability in cognitive activities can suffer by around 20%. It has also been shown to be similar to drinking the legal limit of alcohol, in terms of how it affects performance.
As we hit our midday slump, we also become more negative. Not a good look for traders!
However, it is possible to improve our cognitive ability during the trough. We can perform what Daniel Pink refers to as a napuccino in his book ‘When’.
You must set an alarm to make sure you don’t sleep in for longer, otherwise you’ll experience sleep inertia and feel more groggy and sluggish. But sleeping for over 10 minutes and less than 25 minutes will give you a boost in your cognitive ability in the afternoon.
Later in the day, we start to go through our recovery phase. However, something changes in us at this point, as we are no longer optimal for analytical tasks. Instead, we’re more in-tune for solving ‘insight problems’ and doing creative tasks.
Although our energy levels are picking up, we don’t have the same vigilance as we did in the morning session. Instead, it’s this lack of vigilance that allows us to think more creatively; to find solutions from ‘outside the box’ and make links that we wouldn’t have thought possible.
With all of this in mind, the best time for trading would be the morning session, since we need to be analytical and use a systematic approach. The early evening/afternoon is good for any creative thinking or problem solving (such as trying to figure out connections between elements of your system and your performance). On the other hand, the afternoon slump is not good for anything, so this may be a chance to catch up on your boring admin work!
Everyone has different rhythms and different body clock alignments. This is because we all have a different Chronotype. People who are ‘morning people’ have an early chronotype and those who are ‘night people’ have a late chronotype. An easy way to figure out your chronotype is the following:
Imagine you didn’t have any commitments to wake up for, e.g. you have a day off work or you are on holiday. Think about what time you would typically go to bed and wake up, then take the mid-point of this.
If your mid-point falls between 12am and 12.30am (like 14% of people) you are an early chronotype, if the mid-point is between 6am and 12pm (like 21% of people), you are a late chronotype. The times between those two periods means you are average like most people (65%).
The 21% that are ‘night’ people, experience the reverse of the cycle we just discussed. This means they will experience a recovery, followed by a trough and then a peak (recovery-trough-peak as opposed to peak-trough-recovery). Therefore, their optimal time to be trading is in the evening instead. The morning should be when they focus on more creative tasks such as brainstorming.
Understanding Your Chronotype
Chronotypes can be affected by different factors, such as your age and sex.
Kids are usually early chronotypes but will move on to becoming late chronotypes in their teens, whereas people over the age of 50 are usually more suited to early mornings. Women are also more likely to be early chronotypes than men.
Chronotypes not only affect the type of work you should do at specific times but can also lead to different characteristics in general.
Morning people are meant to be more pleasant, productive, emotionally stable, persistent, conscientious and introverted. They can supress bad impulses, take initiative and are more inclined to plan for the future. These are good traits for traders.
Night people represent the darker side! They are more open and extroverted, and are seen as more neurotic, impulsive and sensation-seeking. They are ‘live for the moment’ type people. Not good traits for a trader!
Night people are also more likely to use stimulants, alcohol, caffeine, cigarettes and other drugs. They’re more likely to suffer from addictions, eating disorders, diabetes and depression. This doesn’t sound great for night people! But luckily, they have also been seen to display greater creativity, working memory and higher intelligence scores. So maybe it somehow balances out!
Whether the traits are good or bad, it’s important to understand them because that means we can put measures in place to control them. If we know about these factors, we can work with them rather than against them.
Essentially the most important part comes down to matching the time of day with the task you’re doing, based on your chronotype. This is known as the ‘synchrony effect’. And for 80% of the population, it will be the typical circadian rhythm with analytical work in the morning, admin work in the afternoon and creative or insight work in the evening.
As I mentioned earlier in the article, the book ‘When’ by Daniel Pink is a fantastic summary of these topics. A lot of the information we’ve discussed in this post is covered in greater detail in his book. It’s a worthwhile read regardless of what you do each day.
Thanks for reading — I’m now off to have a napuccino!
By Nicholas Puri