Today you will learn how to choose the right timeframe
Hello,
welcome back! After a well-deserved break, we continue our challenge today on the fifth day.
Throughout my free series, you have already gained initial insights into the topic of timeframes in trading. However, the importance of this aspect is so fundamental that I have decided to focus today’s post on it.
Those familiar with my trading approach already know my assessment of timeframes in trading. At first glance, it may seem that the various timeframes in the markets offer a variety of options. But the question arises: Is it really meaningful to work with multiple timeframes simultaneously?
This question is not only theoretical but also crucial in practice. The choice of timeframe has a direct impact on your trading and ultimately on your chances of success in the market.
Today, I want to delve deeper into this topic so that you know how to optimize your trading results by consciously choosing a timeframe.
Timeframes merely an illusion?
I would argue that the choice of timeframe is one of the most controversial topics in trading, second only to the choice of strategy. Ultimately, this is because the timeframe is often seen as a “make or break” factor.
Many traders, especially those who trade based on market techniques, believe that I must align my trading with an overarching trend. In my view, this classification is problematic or at least difficult.
The central question is: Which timeframe corresponds to the overarching trend? If I trade on the 1-hour chart, should I orient myself to the 4-hour, 6-hour, or even the daily chart?
As you can see, it is difficult to make this approach practical.
Trading on the stock exchange takes place in the order book, where only price and volume can be found. These pieces of information are recorded independently of timeframes, leading to the realization that timeframes are actually just an illusion created to make trading more visually tangible for us.
They do not serve the market but are a tool for us traders to better visualize and interpret the market and its movements.
In reality, timeframes serve primarily one purpose: to implement your rule set and identify your trading signals. They are a framework that allows you to recognize patterns and trends that would remain hidden without this visual aid.
The challenge lies in finding the right balance and choosing the timeframe that best supports your trading strategy without unnecessarily restricting or misleading you. It’s not about following a rigid rule but about developing a deep understanding of how different timeframes can influence your trading and how you can use them to your advantage.
Multi-timeframe analysis vs. setup
If timeframes are just an illusion, is multi-timeframe analysis meaningful? From my perspective, no.
Within each timeframe, traders operate with different strategies and goals, guided by their own logic. This creates an interesting dynamic. Although a larger timeframe is influenced by developments in shorter timeframes, this dependence in practice only exists in one direction.
Traders who build their strategies on minute charts rarely orient themselves to movements visible in the hourly chart.
A multi-timeframe analysis confronts us with a fundamental dilemma: It often directly contradicts the carefully crafted rule set that guides our decisions.
If, for example, the daily chart does not show a valid trend and thus our rule set is not fulfilled, it does not seem logical to look for entry points in smaller timeframes.
Such an approach would ultimately lead us to modify the parameters of our strategy, which is one of the cardinal sins in trading that you should avoid at all costs.
Consequently, this means that the flexibility to switch between different timeframes often leads to a dilution of our original trading strategy in practice. The attempt to adapt our trading rules to divergent market conditions carries the risk of undermining the rigour and discipline necessary for long-term success.
It is therefore crucial to precisely adhere to our rule set and resist the temptation to constantly adapt our strategy to the fleeting patterns of different timeframes.
All markets follow the law of probability
All markets are subject to the law of probability, a fact that forms the foundation of any trading system. This fundamental principle provides a strong incentive to focus on a single timeframe in trading. The reason for this is compelling and directly related to the performance of your strategy.
Every trading strategy, regardless of its approach, has a certain probability of winning. To maintain the consistency of this performance, it is crucial to trade every signal once your rule set is fulfilled.
If you deviate from this, you distort the value of your probability of winning, which can ultimately lead to a significant reduction in your chances of success.
At this point, the importance of the stop loss becomes clear again, as it serves to protect your trading idea. If you move the stop loss in the direction of loss and thus no longer adhere to your rule set, your probability of winning decreases. This underscores the importance of consistently adhering to your rule set and seizing every opportunity that presents itself.
Let’s look at an example:
Assume you have 20 clear signals where your rule set is fully met, and you must enter a trade.
With an assumed probability of winning of 70% for your strategy, this corresponds to 14 winning trades and 6 losing trades that you could expect.
But what happens if you can only trade 10 of these signals due to lack of time? There is a real danger that you will hit exactly those 6 losing trades, reducing your probability of winning drastically to 40%. That is almost a 50% reduction.
This example impressively illustrates that while the choice of timeframe in trading is important, it should not be the top priority.
What is much more important is not to miss any opportunity and to trade every signal where your rule set is fulfilled. You can and should choose the timeframe you trade based on your personal preferences and trading style.
But regardless of this choice, the decisive criterion for long-term success in trading is the consistent application of your rule set and the use of every signal.
How to choose the right timeframe
Fundamentally, there is no fixed timeframe for trend following. In practice, the optimal timeframe strongly depends on the individual preferences, goals, and available time of a trader.
Many trend-following traders, especially within our community, prefer long-term timeframes such as 1 hour (1h), 4 hours (4h), or 1 day (1D).
Long-term timeframes are excellent for traders who have limited time to monitor the chart due to professional commitments or other reasons. Trading in these timeframes does not require the continuous market observation necessary in intraday trading.
This results in lower stress levels since you are not forced to keep an eye on every market movement. However, the longer holding periods of trades also lead to a lower frequency of trading signals.
For those who desire higher trading activity and are willing to invest the associated higher time commitment, trend following can also be very successful in minute charts. Intraday trading, i.e., opening and closing positions within a trading day, offers significantly more trading opportunities and can be extremely profitable if applied correctly.
Successful trading in intraday trading
Your task for today: choose the right timeframe for your trading
Your task today is to find the optimal timeframe for your trading. This is a crucial step to ensure that your trading strategy is not only effective but also sustainable. To make the best possible decision, you should consider the following criteria:
Long-term trading vs. day trading: First, you should decide whether you are more interested in long-term trading or if you prefer the dynamics and quick decisions of day trading. This decision has far-reaching implications for the selection of your timeframe.
Time investment: How much time are you willing and able to invest in your trading daily? The answer to this question can help you determine whether shorter or longer timeframes are suitable for you.
Stress factor: Do you find day trading too stressful, or do you enjoy the fast pace? If you prefer calmer trading, focusing on timeframes like 1 hour or higher might suit you better.
Trading all signals: Can you trade all the signals that your rule set provides in the chosen timeframe? If the answer is no, you should consider a larger timeframe.
Task:
- Create a list of your preferences and requirements based on the criteria mentioned above.
- Compare these with the various timeframes and assess which best fits your goals and lifestyle.
- Decide on a timeframe and justify your choice.
Have fun with today’s homework. We will see you tomorrow for the sixth day of our challenge.
Until tomorrow
Markus
