Prior to electronic trading, before there was free real-time online access to charting, selecting a time frame to trade with was a non-issue. Standard operating procedure was to simply look at a daily chart and end of day activity. Today this is no longer the case. With easy access to real-time charting, selecting the correct time frame is an important element to a trader's success.
Old school market theory was to always use a large time frame. This mindset was common because the stand alone trader could not access real time charting. In fact, when electronic trading started to gain attention in the late 90's, it was common for traders to spend in excess of $500 a month just to subscribe to a stand-alone charting application. There were no alternatives like there is today.
In those days a common scenario was to simply take standard investing practices and scale those concepts down to trading. We now know the concepts that make a solid trader are not the same concepts that we would apply to investing.
Another common misconception was that you could trade any process in any market on any time frame. The biggest flaw with this idea is that not all markets or trading entities move in the same fashion. Attempting to apply a trading process developed for highly volatile entity like the forex to a low volatile entity or vice versa is just not going to work. Unfortunately we still see today this "one size fits all" trading mentality heavily marketed on the internet. This one misconception is the single biggest contributor to the high failure rate of most traders.
After all it is an easy sell: Buy XYZ trading program and trade it long term or short term on virtually any market. Once the trader gets a modicum of experience he quickly realizes that this thought process literally defies common sense.
The trader in the know understands that we now have the ability to not only select a process that has been developed to trade specific markets, but an integral part of what makes a successful trading process is making sure it is used on the correct time frame.
The key to selecting a time frame is to start small. After all today's online trader has the luxury of looking at price action in small increments as opposed to pre-online trading days. Keep in mind the single biggest difference between a trader's mindset and investor's mindset is that the trader understands his goal is to spend the absolute least amount of time possible in the market while yielding the absolute most amount of profit.
The investor needs time on his side to overcome the day-to-day market fluctuations and hopes that over time he ends up with more money than he started. Remember, the trader is taking advantage of those daily market fluctuations. The trader asks, why stay in a position overnight and be exposed to those fluctuations without the ability to manage the process. It simply is just too much risk.
With today's global economy and easy online access to the markets, folks are quickly realizing that it is just way too risky to be in the markets overnight or for extended periods of time. The numbers are growing exponentially of those who favor the mindset of get in, get a profit and get out, a short term trading mentality. This is a good thing for traders. This new market sentiment is creating ever more short term trading opportunities.
If you want to maximize your potential for profit in the shortest period of time, you need to select a market that is huge and has lots of volatility. Think of volatility as extreme price fluctuations that occur frequently. That condition makes investors lose sleep, but it's the absolute best conditions for a trader.
In order to be a solid trader you have to think like a trader, not an investor.
Hands down, the world's largest and most volatile market is the forex, the absolute perfect market to trade online.
If you select a time frame that is too small, say for instance a 1 minute chart, there is just too much back and forth activity to discern a solid trading setup. This is a form of what traders call whipsaw. So you need to select a time frame that smooths out some of this whipsaw or back and forth movement. However we do not want to pick a time frame that is too large because then we will miss trading opportunities. The sweet spot to be able to realize maximum potential profits in the shortest period of time is the 10 minute chart.
In the forex we can often take advantage of a 100 pip move in one 10 minute increment. Then a common occurrence is that price goes flat for 30-60 minutes and then changes direction, which means another potential trading opportunity.
Another key benefit of trading on a 10 minute chart is it allows the trader to use a very small or tight stop to minimize risk. In fact, another difference between a trader and an investor is that a trader uses stops to protect his capital and minimize his risk. An investor just hopes price will come back in his favor over time should price go against them.
A key element to realize at this point is that if we were to use a larger time frame our stop would also have to be increased. In forex the price action changes so quickly that increasing the stop size exposes the solo trader to too much risk.
The bottom line is using a 10 minute time increment creates a winning formula of maximum profit in the shortest time period while also reducing risk to its tightest possible tolerance.
If you're thinking like a trader you quickly realize that even a 10 or 20 pip move with a very tight stop is the smartest and safest way to go. If you want to increase your profits you simply trade multiple lots.
This way you never violate the cardinal rule of trading: Realize your profit objective in the shortest possible time with the least amount of risk. Another way to look at it is, get in, get positive and get out.
Because the forex is the world's most volatile market, price is constantly changing direction unlike slower, less volatile markets. That is why the trader must select a trading process that work consistently in that type of condition. The first element in that process is selecting the correct time frame.
To learn more visit www.theforextradinginstitute.com
Steve is a seasoned professional trader and trainer with over twenty-five years of experience in the equities, futures and FOREX markets.
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