Sunday, May 04, 2014

What is your preferred timeframe?

One question that pops up from time to time is the question of timeframe. As with all things trading, there is no one right answer that will suit everyone, but there will be a right answer for you.

Your personality or overall thoughts and beliefs about the markets will give you a lead on your preferred timeframe. For example, some traders prefer to be in and out of markets very quickly, and would never hold positions overnight, as they perceive there to be less risk in doing that. Others prefer to hold positions over weeks or even months, so they are less prone to price shocks or noise. There are also the questions of commissions, slippage etc that need to be factored into your trading plan.

Generally new traders start trading on a very short timeframe. This can be due to the fact that smaller equity levels are required, combined with the lure of day trading and making money day after day . This requires the ability to act and react very quickly to whatever signals they are looking for - a scalper or day trader who delays even momentarily in acting on an entry or exit signal can turn a profitable trade into a loss.

There are other factors that each trader needs to consider, such as:
  • how much time is required to sit in front of the PC every day;
  • the level of work or family commitments;
  • their equity level;
  • the type of instruments they want to trade. 
Those who want to trade on an intra-day basis may also look at when it is better to trade, and when not to. Lots of traders who use a longer timeframe avoid taking new positions in the first 30 minutes or so of every trading session. Someone who day trades may well find that same time period is the most profitable of the day. If you want to day trade and have other commitments during that time period, then you may struggle to achieve profitability.

Too short a timeframe will leave you being at the risk of sudden 'noise' or intra-day volatility, which may result from earnings reports, economic releases, or a flurry of buying or selling. For someone who is intent on holding a position for several months, these issues will have no bearing on their trading decisions.

I look at this question in terms of R. Generally, the shorter the timeframe, the smaller the stop required. This makes you more prone to being stopped out on a minor reaction, but if the trade moves in your favour, then it can generate more profits, faster. After all, a +5R profit on a trade is a great trade, regardless of what timeframe is being used. I've had profits exceeding +20R on a few trades - for someone who uses tighter initial stops, possibly by using shorter timeframes, the markets won't need to move as far to achieve the same result. For someone who uses a longer term system with wider stops, in pure price terms then that stock or instrument has to move a lot further in their favour to achieve the same result in terms of R.

With a trend following system, your entries and exits will be determined on your system parameters. Someone who trades a longer-term system will have to endure more in terms of giving back of open profits before their stop is hit. Someone using a shorter-term system will get new entry signals earlier - these could either lead to a whipsaw loss (which would not be suffered by the longer-term system user), but it could also mean you can get into a profitable trade which may not register at all on the longer timeframe. You pays your money, you takes your choice.

However, whichever basic timeframe you settle on, the principles of having a clear trading plan or rules that you can consistently follow, combined with strong risk control remain the same.

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