Different Time Frames of Trading

We can speak of trading time frames in terms of the time one expects to be in trades on average, and we can also approach time frames as far as what time frames we are setting our charts to in order to monitor our trading.

While these are two separate conditions, they are very related, as the type of charts we use, the length of each bar on them, is going to influence how long we stay in trades, and our strategy for how long we wish to hold trades is going to affect what sort of charts we use.

Of the two, the type of charts we will be using is going to be the most significant, because together with the signals that we are using on them, this is going to determine the length of our trades directly. Still though, traders do need to have a sense of what style of trading they are looking to engage in, and this requires a general idea of what time frame we are seeking to trade in.

There are three main styles here, intraday or day trading, where positions are entered and exited the same day, swing trading, involving trades of a few days to a few weeks, and position trading, involving trades ranging from a few weeks to a year or two.

Some traders aspire to be one type or another, as a matter of preference mostly, or by way of practical considerations. The shorter the time frame, the more active the trader needs to be, as positions need to be monitored more frequently and more decisions made overall.

Different Time Frames of TradingWhat separates trading though is the goal of actively managing one’s trades, and one can select any time frame one chooses, from one second bars to monthly bars and everything in between, and from being in trades for only seconds to several decades.

The main categories here simply allow us to understand what sort of trader one is in a general way, where for instance if we know someone is a day trader we know they trade a lot and look to capture smaller moves while limiting risk, and so on.

Swing traders give their trades more room as they have to if they are going to be hanging on for them longer on average, and may monitor their trades a few times a day or even once a day. Position traders are prepared to take on even more risk to shoot for bigger moves per trade.

Time Frames and Charting

Charting is the cornerstone of trading, since charts are used to time trades and timing trades is what trading is. While some traders take fundamental analysis into account to some degree, particularly those who are looking to stay in trades for a year or more, charts are where the rubber meets the road with monitoring the performance of securities and therefore play an essential role in trading.

While it is possible to monitor trades informally, perhaps just looking at quotes from time to time and remembering where you entered, this is not a particularly effective or promising way to trade, as it is difficult to come up with a good plan based upon just this criteria.

The goal in trading isn’t just to capture gains, it is to seek to capture gains optimally while managing risk sufficiently. Since we seek to capture moves in the price of an asset, it becomes necessary to monitor the momentum in play in order to assess how strong our positions are and how likely that the trend in our favor will continue.

This has us choosing charting strategies, which include both how we are going to monitor this momentum and what time frame we are looking to monitor it in. This may involve a number of different measurements, and will also require us to apply these measurements to our chosen charts.

A simple example would be to choose to trade with a moving average, where we’re going to decide both how many periods our indicator will average, for instance a 10 or 20 or 200 period moving average, and how long these periods will be, a day, an hour, etc.

The indicators that we use will measure momentum of various magnitudes depending on our choices of time frames, and provide us with a way to decide whether to enter a trade and when to exit.

The shorter the time frame used on the chart, the more sensitive our signals will be, and vice versa. We will use these charts and indicators, including the movement of price itself as an indicator, to formulate our trading strategy.

Risk Across Different Time Frames

The shorter the average duration of our trades, the less we will be exposed to risk per trade, although this does not necessarily mean shorter time frames are less risky overall. This will depend as well on how well we trade, how in tune with the actual momentum that our expectations are, and a bad trader can get themselves in way more trouble than someone who trades very infrequently.

Shorter term trading requires tighter stops, the maximum amount that we are prepared to lose on a trade. This corresponds, or should correspond at least, with the point where what was expected in the trade fails to be probable anymore.

Shorter term trades have smaller expectations on the upside, so they need to have smaller expectations on the downside as well. Longer term trades, which look to capture bigger moves, need wider stops so that one does not simply get stopped out of good trades, when the probability is still in our favor.

If we seek to capture longer term trends for instance, within these trends will be shorter term pullbacks of differing magnitudes, and we only want to exit when these moves are significant enough to serve as a tipping point in our strategy, where the trade then takes on a negative expectation.

If we set our stop at a relatively meaningless loss in reference to our plan, we will exit a lot of good trades and end up seeing our plan fail. The key is to look to balance the risk we are willing to accept with the profit potential of the trade.

So, while longer term trades do involve more risk than shorter term ones, a higher risk tolerance is required generally, so that we may see our plan through and not just bail when we should not be bailing.

Time Frames and Trading Costs

While shorter term time frames do involve less risk as far as our positions go, they also involve higher transaction costs, and the cumulative effect of this is going to affect the overall risk of a given strategy.

This can serve to complicate things as far as risk management goes, and this is the undoing of a great many traders in fact. They may see themselves profiting from their trades as far as the trades go, but once trading costs are deducted, they may see their profits greatly diminished or even may suffer net losses.

Even if you are trading commission free, for instance with forex trading, where the only cost is the spread, you still have to pay the spread, so multiple entries are generally going to involve paying this spread versus saving it if you stayed in it. This is on top of the slippage that occurred, for instance with exiting a position and then re-entering it at a worse price.

If one encounters too much of this then this will impact one’s risk, as these are costs, real ones or opportunity costs in missing out on some of the action while on the sidelines watching, that affects one’s results and will increase one’s downside risk exposure ultimately.

The main risk with short term trading isn’t how much you lose per trade, it’s how much you may lose over a given period. One trader may lose a certain amount on a trade, but if you’ve traded it multiple times, you can lose more on the trade itself in addition to the added costs of placing several trades.

Trading Time Frames and Efficiency

The more often you trade, and the shorter time frame you trade in, the more skill matters, and if one is going to be tinkering with one’s trades more, it takes skill to do that well, and if one lacks the skill, one may end up in more trouble.

Trading frequency accelerates both advantages and disadvantages, it leverages both skill and the lack of skill, and one’s skill level needs to be accounted for when deciding on desired trading time frames.

The goal of trading on shorter time frames and trading more often is to seek more efficiency than just holding the security, where one either looks to be out of the security when the momentum suggests one should be, or even to capture the momentum going the other way and play both sides of it.

When trading currency pairs for instance, we see the two currencies fight it out where one may have more momentum, and then the other gains the upper hand, and if we can be on the right side of these moves we stand to profit a lot more than just going with one or the other and sticking to our guns.

If we’re going to do that though, we have to be right more than we’re wrong, and it’s actually pretty easy to be wrong more than you are right with these things, especially without a good plan. In particular, a lot of traders end up taking profits too soon and letting their losing trades run too much, the opposite of what is desired, since this limits profit too much and risk nor enough.

The idea with trading is to look to manage the ratio of risk to reward and you certainly want to pay enough heed to the reward side, and not exit trades where the probability of their continuing to work is high enough. You also don’t want to stay in trades where the probability has clearly shifted against you.

Trading strategies are all pretty similar across all time frames, and if you can trade one second bars you can trade monthly bars and everything in between, generally speaking. What differs is how often you are acting upon your plan, and as long as your plan is a good one, all other things being equal, shorter time frame trading will outperform longer term ones.

One may choose not to be so involved with trading even if one is an expert though, and beyond that, people may not simply have the time to monitor their trades in the way that it is required of them to do so, and therefore choosing a given time frame for one’s trades can be very much a personal thing.

Success in trading is all about the quality of one’s trading, and not so much about the time frames one trades in, and provided one has the right skills here, one can pretty much select any time frame and be successful trading in it.

Andrew Liu

Editor, MarketReview.com

Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.

Contact Andrew: [email protected]

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