Some observations on choosing a time frame to trade

This is a follow up to the post what time frame are you trading/investing in.

Choosing a time frame to trade that fits your personality and psychological makeup is one of the most important steps to make if success is to be achieved in the trading game. Some people like action, fast moving markets and volatility while others prefer a more slower, cautious approach. It's difficult to be able to do both and can be a nightmare if you get involved in a type of trading that you are simply not suited to, so it's better to find out as early as possible what time frame of trading you feel comfortable with. However, each time frame that can be traded throws up its own questions, so based on my own experience I thought I would post a few observations.

First, short term trading. I found very quickly that this did not suit me. To be a good short term trader, day trading where you may be using the tick,1, 3 or 5 minute chart, you have to be able to handle volatility and market noise. Many of the market moves over the very short term time frames are noise, with many potentially false signals, not only do you have to be able to trade quick, but also get rid of potential losing trades quickly. On shorter time frames potential big moves while they do happen tend to be rare. While it's certainly possible for those with the right psychological makeup to make decent money on perhaps just 5-10 winning points a day, no one should kid you that it's easy. If you like action then this time frame may be for you, but by and large, at least according to many reports, most traders, especially spread bettors who choose this "action" type day trading tend to lose.




Medium term trading or swing trading is perhaps suited to those who still want action, but spread out over days or perhaps a few weeks. The time frame traded here may well range from the 4 hour to the 30 minute chart, although the latter may still be too fast if you are trading individual equities. These time frames will also tend to throw up enough noise and false signals as well although catching a bigger move is more likely. If you trade these time frames it is best to trade with the trend on the much longer daily, weekly and even monthly charts, although it can be rare that these will all align. One problem here is that you may get caught up in range bound or consolidation periods when the price doesn't do much, but gives plenty of false starts.

Trading off the monthly, weekly or daily charts is probably the most ideal if you want to catch the big move and prefer the slower approach to trading. On the longer time frames market noise is almost eliminated, the ups and downs tend to flow better, it's slower in the sense that if your set up is good enough to catch the move up or down early enough the potential reward is high. However, like all the time frames you still need to have the right psychological makeup to take advantage of it. Trading the longer time frames takes patience, the trades are rarer, on the daily chart you might only get one trade a month, on the weekly it might be every 2-3 months, while the monthly charts might give you one or two opportunities a year. You also have to learn and have confidence in a system to let the winners run and not be shaken out by occasional pullbacks along the way.

My own preference is for the longer time frames, a conclusion I came to having tried all of the above. Fortunately for me, day trading didn't cost me my shirt, but there again I found out mostly from demo account trading that it didn't suit me. For those who aren't sure what time frame suits you, a demo account should help, but nothing can replace the feelings you will get when real money is at stake. Still, it is better to lose fake money on demo accounts while you find your way than real money in a market that will happily take it off you if you are trading the wrong time frame.