Trading Strategy Design – Choose Trading Time Frame

After making the decision on what type of market you will trade as I talked about in a previous article, you now come to the making decision as what time frame you will trade. This decision is also an important one when you are designing a trading strategy.

Firstly, you have to decide decide whether you will trade intra-day or not. If you trade intra-day, you will become a day-trader that means trading full time. It may be possible to trade intra-day while yiu have a day job but it is very difficult. So, I would not recommend that you to trade intra-day unless you can devote your full attention to trading.

Generally, most people want to trade only part time and still hold down a day job. Therefore, it is better to trade daily or weekly charts. Since you will only be able to look at the market after hours so you have to take this into account when you do your strategy design.

The designed strategy should not require checking the market during the day. However, I believe that the more bars you can trade, the more money you can potentially make. That means trading intra-day is potentially more profitable as there are more bars condensed into a unit of time.

For example, in a period of month, there are 280 bars in 30-minute charts, 20 bars in daily charts, 4 bars in weekly charts and only 1 bar in monthly charts. So, there is potentially more money in the 30-minute charts than the daily charts, potentially more money in the daily charts than the weekly charts, and potentially more money in the daily charts than the monthly charts.

Then, to make $10,000, it should take less time on the 30-minute chart than the daily chart, weekly and monthly chart. When trend trading on 30-minute charts, you may trade through 5 or 10 days of directionless market before the relatively big move occurs while on a daily chart, the chop may last six months or longer, and on the weekly charts the sideways market could last for years.

In addition, the risk per trade is generally greater when you trade with the longer time frames. Most entries and exit orders are based on market action. Since we usually put an exit order below the low of the previous bar, this could be 30 points on a 30-minute chart, 500 points on a daily chart and 1500 points on a weekly chart. The difference in risk is substantial, but the reward should be proportionally as large.

There are no right answers in choosing the time frame. It depends on a personal decision. And you have to make this decision before you start looking for indicators, as the choice of indicators is influenced by the time frame selection.

Taro is an experience trader who trades in stocks, futures, forex. He strongly focuses on technical analysis, trading systems and money management.