News & Analysis

Time For a Change? Considering Longer or Shorter Timeframe FX and CFD Trading

February 27, 2019

 

One of the most common questions we are asked on some of the webinar sessions we run is “What timeframe might be best for me to trade?”.

This slightly longer article than we would usually write,  seemed merited to provide some detailed “food for thought” as it appears to be an important issue for many.
This is not something we can answer for you as an individual, as which timeframe(s) you choose to trade is a personal choice, but the purpose of this article is to put forward some of the considerations that you should contemplate as you make this decision for yourself.

Generally speaking, and to offer up some sort of definition for the purposes of this article, traders choose to trade:
• Shorter (fast) timeframes intraday (1-15 mins)
• Medium timeframes intraday (30mins-4 hourly)
• Longer (slow timeframes) daily (4-hourly-daily)

There are usually two common motivations that may lead the trader to consider a change in the timeframes they are currently trading:
a. Having difficulties “fitting” trading around other life activities.
b. Believe that changing timeframes may produce improved results (or same results with less impact on lifestyle).

Before moving on further, and particularly if in the “b” group ask yourself this key question:

Should I be considering a timeframe change at all or are there other priorities I should have?

 

Before considering a timeframe change, we assume that you have the following in place:

  • You have a written trading plan/system that specifies entry, exit and position sizing criteria AND the timeframe(s) you are currently trading.
  • You look at the market before making any decision related to entry (including pending orders), initial risk minimising exit (stop loss), profit targets, and any trailing of your initial stop.
  • You consider economic data/announcements as part of your decision-making processes and understand the different impact that different types of “news” can create.
  • You have a method through which you can determine the success or otherwise of the decisions you make including that of timeframes traded (e.g. a trading journal).

If you do not have ALL the above in place, then perhaps your priority may NOT be deciding whether to change timeframes.

 

So, with a tick placed by the above, if it is right to consider a change in time-frame, there are commonly three overview factors to consider.
1. Your access to the market (screen-time – how much and when).
2. Flexibility (how frequently you can touch base with the live market).
3. Competence and understanding relating to the practical trading implications of any timeframe including trading set ups and risk management including position sizing.

 

Let’s explore these in a little more detail with FOUR key considerations:

1. Technical considerations

Here is the good news…The following are relevant in ANY and MULTIPLE timeframes:

  • Chart patterns
  • Candle information
  • Indicator usage in entry and exit systems

If you are moving to a longer time-frame consider:

  • Differences in key chart values (e.g. volatility). You need to adjust your thinking in terms of what is the norm for the timeframe you are looking at. So, for example a 40 pip move in a 4-hourly chart may be the normal value whereas on a 15-minute chart this would be a massive move.
  • Key data times. There are critical points in the day where there may be several economic data releases in a relatively short time-span. These usually coincide with the opening of relevant equity market open. So, for example most of the significant data out of the US will be released within a two-hour window straddling the US stock market open (8.30-10.30 US EST). Hence price action seen on charts, will usually be at its most active during these times. Get to know these if you are trading longer term timeframes.

 

2. Risk and position size considerations:

With faster timeframes, traders generally:
• Open larger positions with the trading idea of a smaller Pip move.
• Have a tighter Pip stop loss as even smaller movements impact significantly on dollar outcome.
• Are aware the even “less significant data” can create more relative market “noise” and need to have this factored into trading entry and exits decisions.

With slower timeframes, traders generally:
• Open smaller positions with the aim of a larger Pip move. Tighter Pip stop loss as even smaller movements impact significantly on dollar outcome.
• Have a wider stop-loss as smaller movements irrelevant and so there is less chance of being taken out by price movement “noise” within a longer price move.
• Are aware that relative major movements are from major data points (and therefore need to learn what these are).

 

3. Practical considerations

Firstly, look at the time you have to invest in your trading (and this may be subject to negotiation with partners etc., and of course with what else is going on in your life).
If you are planning ring-fencing screen time, for example a couple of hours per day, then giving the attention to trading shorter timeframes may be more viable.

If it difficult to access larger amount of “block” time but short frequent touch base with the market is possible, then longer timeframes may be more suitable.

Generally speaking, to give an example of how the latter may work in practical terms, you may have a trail stop strategy that you wish to adjust at the close of each candle/bar. If this is the case, then if you can check in hourly, an hourly timeframe may work for you.

Four other things to consider:

  • Even if trading longer timeframes some trader choose to use a shorter timeframe to ‘refine’ entry, if trading a daily chart. After entry, as stated previously you should subsequently stick to the longer timeframe for decisions.
  • If trading shorter timeframes, many traders use a daily chart for the “big picture” to identify long term trends (to avoid trading against these) or to identify longer term key price points (e.g. well-established support and resistance).
  • There are some trading approaches that are promoted as being daily approaches e.g. Inside bar.
  • Holding costs are associated with daily chart trading (these are covered in a separate article (see https://www.gomarkets.com.au/know-the-score-holding-costs-of-daily-fx-positions/) and of course you can touch base with your account manager for further clarity).

 

4. Mindset Considerations:

Any article on just about anything to do with trading would not be complete without some reference to the psychological and subsequent behavioural aspects of the topic.
Here are some of the common mindset issues to consider:

With shorter timeframes:
• It is easier to get sucked in to watching price movements (i.e. ‘staring’ at the P/L column continuously) that may evoke emotional decision making rather than be based on your trading system and CHART price action.
• Short term trading is perceived as being more “exciting”. If you find this resonates ask yourself are you really trading for excitement or for profit?
• Your business is “done for the day” when you are finished trading which means you are not “distracted” by the market when other life things should have your focus.

With longer timeframes:
• Not generally “peddled” as an advantage of FX trading by the “gurus” out there. Therefore, it may feel that to trade daily charts is going ‘against the norm’ and may feel uncomfortably strange at first.
• If you have traded shorter timeframes previously, it is a habit you may have to work at breaking and resist the temptation to take a “sneak peek” at shorter timeframe charts, and alter your decision-making.
• There are many “experts” you will see wheeled on to give an opinion on CNBC, Bloomberg etc that have a prediction about what may happen in the future to any currency (or index/commodity if trading CFDs). Remember:
a. These “experts” are not your ticket to riches but are there to make interesting TV as well as provide some insight. Indeed, you will often find contrary experts brought on at different times in the day. Their opinions should be viewed as you would with any “hot tip” i.e. thank you ‘Mr Expert’, but does it fit my trading plan?
b. There is a greater temptation to move away from one of the golden rules of system trading i.e. “Trading what you see rather than what you think” (or what the experts think)”.

• May occupy thinking throughout the day and so may be more difficult to “let go” and give the focus to the rest of your world outside trading.

 

And to finish….

What happens next is down to you!

a. If you haven’t tried to trade longer/shorter timeframes why don’t you test it out (but see point re, should it be your priority).
b. Trade as you do now LIVE and trade different timeframe on demo. Compare not only the results but the impact on the rest of your life activities. Journaling may help.
c. You may make the choice to trade multiple timeframes. If you do then you should make sure this is reflected in your trading plan/system and what market circumstances would lead you to trade which timeframes.

We trust that this has been useful, even if the outcome is that you make the decision to continue to trade your current chosen timeframes and of course please feel free to share this article if you think it would benefit others (it’s easy just click on one of the social media links to make it happen).
Finally, if you are not part of the growing GO Markets ‘Inner Circle’ community, where you can access weekly education sessions, you are invited to join our Facebook group at https://www.facebook.com/groups/343455529804140/

 

 

This article is written by an external Analyst and is based on their independent analysis. They remain fully responsible for the views expressed as well as any remaining error or omissions. Trading Forex and Derivatives carries a high level of risk.