When not to day trade: the days worth sitting out

Sitting out is a decision, not a gap

Every session arrives looking like an opportunity. The screen is moving, somebody is posting a winner, and the idea that today simply isn't worth trading feels like missing out. That feeling is expensive. For a lot of day traders the damage isn't done on the days they were wrong about direction. It is done on days that were never worth trading at all.

The trade-off is plain once it is written down. A day you sit out costs you the chance of a good trade and nothing else. A bad day costs money, commissions and, most expensively, the state of mind you carry into tomorrow. Avoiding that doesn't require being right about the market. It requires recognising the kind of day in front of you before the first order goes in.

The days worth sitting out fall into four groups, and the last of them has nothing to do with the market. Our guide to reading trading conditions makes the general case for not trading. This one is about recognising the specific days.

Days the calendar writes off

Some sessions are decided by a scheduled event that lands in the middle of them. The clearest case is a Federal Reserve decision at 2:00 PM ET. The morning drifts because nobody wants to commit before it, and the afternoon reprices twice in an hour, once on the statement and again on the press conference. No setup tells you which way that goes, and a stop placed on a normal day's logic can fill far from where it was set.

Releases before the open are a different problem. CPI and the jobs report land at 8:30 AM ET, so by the cash open the market has had an hour to decide what it thinks. Those days are often tradeable once the first reaction settles, which makes them days to trade smaller and later rather than days to skip. Our guide to how CPI, jobs reports and Fed days move stocks covers what each one tends to do.

Days too small to pay

A day can be calm and orderly and still not be worth trading, because it is small. Every setup needs the market to travel a certain distance to work: far enough to confirm, far enough to reach the target, with room for the stop and the costs on top. When the whole session is only likely to cover a fraction of that, being right about direction still leaves you without a trade.

Put numbers on it. Say your setup in ES waits for 10 points of movement to confirm, then risks 8 points to make 16. From the start of the move to the target, that is 26 points of travel in one direction. On a session where the largest one-way run is expected to be around 22 points, the setup can be perfect and the day still can't pay it. You would be right, and flat or slightly down for the effort.

The signs of a small day are usually there before the open: a narrow overnight range, an empty calendar, a low and falling VIX, and price sitting in the middle of the last few days' range. Our guide to telling a trending day from a choppy one goes through each of those. The habit worth building is to compare the size of move your setups need with the size the day is likely to offer, instead of only asking which way it will go.

Days the market is thin

Who is trading matters as much as how volatile the tape is. When a large share of the market's usual participants are away, liquidity thins, fills get worse, and price can sit still for hours and then jump on orders that would barely register on a normal day.

The US stock market closes early, at 1:00 PM ET, on the day after Thanksgiving and on Christmas Eve, and usually around Independence Day too. The weeks around those holidays tend to be quiet, the stretch between Christmas and New Year most of all. The Friday before a long weekend can trade like half a day even when the session runs its full hours, and late August, with much of the market on holiday, has a similar reputation.

Days you are the problem

The last group has nothing to do with the market, and no chart, calendar or conditions score can see it. These are the days when the biggest risk in the trade is the person placing it.

• You have hit your daily loss limit. Trades placed after a limit are placed to win money back, not because a setup appeared. If you don't have a limit, that is the thing to set before tomorrow's open.
• You are coming off a large loss. The urge to recover it is strongest the next morning, and it is the urge that turns one bad day into a bad week.
• You are tired, ill or distracted. Intraday trading is a job of attention. Half your attention does not buy half your edge. It usually buys less.
• You have no plan written down. If you can't say before the open what you are looking for and what would make you stop, the market will decide both for you.
• You need today's result. Trading money you can't afford to lose changes every decision you make, and rarely for the better.
• You have just had a big win. Confidence creeps into position size, and trading larger the day after a big win is one of the most common ways to hand it back.

Sit out, size down, or trade normally

Most difficult days aren't a clean yes or no. The middle setting, trading smaller or trading only your best setup, is the one most people forget they have. These are reasonable defaults to start from.

Decide before the open

The discipline in all of this is timing. At 9:25 AM ET, with nothing on, it is easy to look at a Fed afternoon or a dead holiday week and leave it alone. At 10:15, one trade in and down, the same session looks full of chances. So make the call first, while nothing is riding on it, and write it down:

• Does anything major land inside the session? If so, decide now when you will be flat.
• Is the day likely to travel far enough for your setups? Compare the size you need with the size on offer.
• Is it an early close or a holiday week? If so, trade smaller and plan to finish early.
• Are you in a state to trade? Answer it honestly, and before the first chart.

Then keep a note of the days you sat out and what those sessions did. Over a few months that note shows which kinds of day actually cost you money, and it will be more useful than any general list.