Choosing the correct time frame for your style of trading is an important step in creating a workable trading plan. If the time frame is too short or too long to suit your personality, the trading plan will not survive, no matter how good the system or trading approach is.
The longer-term position trader has a much simpler task of finding the ideal time frame. The choice is usually the daily time frame, the weekly time frame, or the monthly time frame.
The daily time frame is by far the most commonly used, and that is the problem with it. Since so many traders use it, they all know where the daily swing or inflection points are. It is easy for floor traders to run stops in those areas, and then bring the market back the other way. And, daily time frame traders mostly get trading signals on their indicators and oscillators at roughly the time. The daily time frame is extremely crowded. When everyone is looking at the same thing it is difficult to gain an edge. It is best to get out of the crowd, and go to either a shorter time frame, or a longer time frame. Going to a weekly time frame seems to be a practical solution to get out of the noise of the crowd, allowing the trader to see the longer-term picture more clearly. Often when the daily chart appears as unpredictable noise, you can find clear trends on the weekly chart.
The short-term day trader has a more complex set of choices to make. On the intraday time frame there is almost an infinite number of time frames to choose from. You can trade a 1-minute chart all the way up to a 120-minute chart, and beyond. To complicate matters, there are also volume and tick charts. Tick charts create a bar when a certain number of ticks are registered; therefore not dependent on the time it takes to accumulate those ticks. Similarly, a volume chart creates a bar when a predetermined amount of volume has been recorded.
As in the case of the trader on the daily charts, the day trader should also try to stay out of the crowd and the noise. By far the most common and popular intraday time frame is the 5-minute chart. And, like the daily time frame, that becomes its problem. The 5-minute chart on many markets will exhibit very choppy trends and cycles. The market swings are often poorly defined. Breakout points often lead to failure. Longer and shorter time frames seem to define the market structure better.
An even better choice on the intraday time frame is the tick or volume chart. Minute based charts have significant problems by their nature. First, when a market is marking time and not making any significant swings, the minute based chart will show many trendless, small range bars. When a move does begin, often the entire swing, especially if it is news driven, will occur on one or two bars. Unless you can get in the trade as the bar is forming, you often miss the entire move by time the bar forms. Tick and volume charts mostly avoid this problem. When the market is quiet, on a tick chart very few bars will form. And when the market gets active, several bars will form to define the trend and the swing.
The other problem avoided by tick and volume charts is what to do with the overnight session. Many traders say the overnight session doesn't matter and should be disregarded. The markets are now global and are traded 24 hours a day. It is arrogant to think the only trading that matters is what happens in New York or Chicago. Also, reports are mostly released pre-market. News can happen while we sleep that can create large gaps on the day session chart. Those big gaps can play havoc with most technical indicators.
If you choose to use a tick or volume chart, the best time frame will be dependent on your trading style, personality, and your data feed. The shorter times frames will obviously have many more traders per day, but will also have a much closer stop loss point. Regarding data feed, some providers transmit a sampled data feed which will not match the same tick chart from a different provider that uses a full data stream. Experimentation is needed to find a tick or volume chart time frame that defines the swings clearly. Too short a time frame will cause the bars to look like chicken tracks, as the bars will not have enough ticks from low to high to form a normal looking bar. Too long a time frame might be late in capturing the swings you are trying to trade.
Some traders avoid the choice of time frame by trading a chart based on pure market structure such as a point and figure chart. This method does eliminate the need to choose a time frame, but there are other variables to consider, such as adjusting the sensitivity of the reversals and the number of points in a box. Point and figure was a very popular method many years ago. It is still used today, but with the introduction of the personal computer and the vast array of technical indicators available, point and figure has lost much of its following. Because so few traders are using it today, it might now be a viable approach to explore to stay out of the crowd. There is much information available on the internet if you want to explore this technique further.
Many trading approaches are built on multiple time frame analysis. However, in real life trading, multiple time frames can be more of a detriment than a help. It is common for one time frame to be giving a buy signal, while another time frame is giving a sell signal. By the time one time frame starts to get into synch with the other, they flip over and get out of synch again. Meanwhile, many worthwhile trades are passed by because the two time frames never come into agreement. If you add a third time frame you have just increased your frustration level by 50%.
After years of trying every imaginable time frame and combination of time frames, here are some practical conclusions: It is best to treat each time frame independently, and to take both entry and exit signals from just the one time frame. It can be tempting to switch time frames in the middle of a trade if a different signal is being generated in a different time frame, but it is often a mistake to do this. And, it is best to focus on only one time frame in any given market, and not be tempted by having several other time frames of that market on the screen. Multiple time frame trading can cause confusion and analysis paralysis. Many signals being generated by any number of the other time frames will of course be missed. However, by trying to watch several time frames simultaneously, many more signals will be missed. It is very difficult to keep focus, especially in day trading, on more than a couple of charts at a time.
Nothing is perfect in trading. There is not one best time frame. On one day a certain time frame will capture the character of the market perfectly, but then the next day a different time frame will capture the day better. If you keep jumping around to different time frames there is less of a chance you will catch the good trades when your time frame gets back in synch. It can become an endless search for the perfect time frame. It is a moving target. It is chasing a rainbow. It is best to stay in the one time frame you are comfortable with, and let the market cycle come back to you. You will be in better synch with the market, better focused, and better able to jump on opportunities when they arise.
Doug Tucker has a blog with daily commentary on stock indexes, precious metals, and other markets. There are many articles on technical analysis and indicator design and interpretation. To visit go to: http://tuckerreport.com/
