[dc]R[/dc]eader Wei asks: From the examples in the book, you are clearly a long term trader using daily and weekly time frames. But what combination of time frames would you think is the best to apply the concepts and strategies in your book to day trading?
Wei, conceptually, everything in the book can be applied to any combination of timeframes. It is easy to go overboard and obsess on details of how to combine, what timeframes to use, how to color, size, arrange, charts on your screen, and a certain amount of that type of work is probably useful from the standpoint of settling into your workspace. It’s also easy to overthink combining timeframes and to make the setup too complex. A few things to think about:
- The choice of timeframes depends on several factors, but the most important are probably the liquidity of the instrument (some are illiquid if you try to go down to too low a timeframe) and your ability to process information. I spent a few years trading one minute bars, and it does get exhausting to process on that level—you literally cannot miss a tick of the market, and will spend pretty much every waking moment at the screen.
- Risk is another concern. Higher timeframes take more risk, but you can’t trade if you are undercapitalized. It just won’t work. Some retail traders try to make a go at things with a $500 FX account, and some prop firms (your question mentioned that you were a trainee) set risk so tight that the trader is constantly worried about the loss of every tick. If all you think about is losing, guess what’s going to happen? Risk scales with the square root of the ratio of the timeframes, roughly. So, if you need to risk $250 on a trade on a 5 minute chart, you’d probably be risking about $111, $430, and $866 on 1 minute, 15 minute, and hourly charts, respectively. This is not a firm rule, but it is a very good rough guide.
- Rather than try to start with a complex three timeframe screen, maybe just start with two: the timeframe you are trading and a higher timeframe. For most new traders, having a lower timeframe screen can be a problem. They will find their attention drawn to the higher activity on that lower timeframe, and will, very soon, drift to actually trading the lower timeframe. Start with two.
- Timeframes on charts usually need to be related by a factor of about 3 to 5. Again, that’s not a hard and fast rule, but going far outside that range (e.g., 1 and 2 minute charts, 5 minute and daily charts) is usually not a good idea because your charts will either be redundant or will miss important information in the middle of the two timeframes.
- Whatever you do, the most important thing is to stick with your chosen timeframe. I’ve written a lot about the ways this can go wrong, and there are many: you can start trading lower timeframes, you can find justification on a higher timeframe to continue holding a losing trade (I call that the “Timeframe Justification System”, and it’s a really good way to migrate a small scalp up to the monthly chart and lose $20,000 on a trade where you thought you were risking $200.) In general, if you find yourself shifting timeframes or looking at new timeframes while you’re in a trade (especially a losing one), you are probably in trouble, from a behavioral standpoint.
I hope this helps. Just keep things simple and clean and you will be fine. Best of luck!