I believe one of the most often overlooked yet simple decision to make when developing your trading plan is the timing. What will your trading style be like and what type of trends will you look to trade?
I also believe this is critical as trying to trade a wide range of trading styles and time frames at the same time, becomes counter-productive. It makes it difficult for the trader to focus on one approach and master that approach.
At some point of you developing your strategy and trading plan, you will need to decide on your trading style. This is very important and is a problem new traders have. If you don’t decide on a particular trading style, it will be difficult to create specific trading rules and commit to them. It will also be difficult to be consistent and you will find yourself making up your rules as you go along.
Even though it isn’t obvious, one of the first things you need to assess is how much time you have available to commit to your trading. It is probably the last thing you think about, if you think about it at all. This is critical and would be one of the most overlooked factors when people begin devising their trading style.
Can you spend several hours every day digesting trading data or only a limited time during weekday evenings and some time on the weekends? For example, if you have only a little time during the week to trade, then you will find it almost impossible to trade diligently using short-term trends, due to the amount of time this would demand of you.
Generally speaking, the potential for returns in short-term trading is greater than those with medium- or long-term trading approaches especially when derivatives and leveraged products are included in the trading, hence the attraction to this style of trading.
As people are generally infatuated with money, they are naturally drawn to short-term trading because of the very real possibility of achieving good returns quickly.
If you cannot afford the time however, you will find yourself cutting corners and not following your plan adequately. In this scenario, unfortunately, the chances are that you are on the road to failure, as you have not developed an approach that is right for you.
Short-term trading by its very nature demands constant attention and a reasonable amount of your time during the trading week in order to monitor open positions, adjust stops, conduct analysis and make your trading decisions.
Often derivatives or leveraged products will be used to counter a lack of equity; however, the degree of skill, discipline and risk management to trade these successfully is far greater, further reducing the chances of long-term success for beginner traders. The derivatives enable you to benefit from the price movements over such a short period of time, as well as allowing you to trade in both directions, i.e. trade long and short.
You can also assess your patience. This will also have an influence over the time frame you select for your trades. If you are an impatient person then you will find it hard to wait for certain trends to develop before entering a position. You will be wondering why you didn’t get into the position a little earlier, when you knew it was starting to head up, rather than waiting for the level of confirmation that other traders require.
Let’s talk about the practicals. All trading platforms, including those from Valutrades allow you to vary the time period over which data is measured. In daily charts, one bar or candlestick represents one day’s worth of data, but it is also possible to view 1-minute, 5-minute, hourly, weekly or monthly charts and so forth, that take the opening price for that period of time, and the subsequent high, low and closing prices to form a single bar or candlestick. Charts that display bars of less than 24 hours are commonly referred to as intra-day charts
This is known as the periodicity of the chart, i.e. how much time is captured within each bar or candlestick. Below is a simple image taken from Valutrades’ MT4 platform displaying the different time frames available.
As I mentioned earlier, my experience has been that traders are drawn towards the left-hand side of that menu, i.e. to shorter time period charts.
Only when you determine the time frame over which you will trade, you can then decide about what type of data is appropriate for you. For example, a day trader, who would consider trades over very short time frames, would have little use for weekly or monthly charts.
Assuming you have considered the relevant factors, using the table below and using the right-hand column, you need to decide on what your ideal or typical duration of a profitable would be. Therefore, when you picture yourself trading well, what is your trading style and how long does your average profitable trade last for? From that, you can categorise that time frame as a particular trading style.
It is important to identify your trading style as many decisions stem from this. For example, this may determine the periodicity of the charts you use. Refer to the table below as a guide.
The way you identify trends and how you set your stops will also be determined by your trading style.
Let’s look at a simple example of different trading styles. In the hourly chart below of the AUDUSD, as the price fell, trader A may have traded the AUDUSD on several occasions as it fell, rallied and fell further.
The same price action above is captured in the last three red candlesticks of the daily chart of the AUDUSD show below.
Trader B, using daily charts, may have gone short in the AUDUSD as it fell from resistance around 0.73 and may well still be in the trade.
The same currency pair and the same 72-hour period and yet two traders have traded it differently based on different time frames.
At some point of you developing your strategy and trading plan, you will need to decide on your trading style. Regardless of your trading style, you should still follow the time-tested trading rules - the way you apply the rules will slightly differ with each style.
About Stuart McPhee
Stuart McPhee has traded for over 20 years and is the author of the best selling book Trading in a Nutshell, 4th Edition. He is one of Australia's most compelling speakers on trading and has personally coached high net worth traders all over the world. Since 2001, he has spoken live in front of tens of thousands of fellow traders from Mumbai to New York, Tokyo to London, Melbourne to Beijing, and many places in between. He has helped countless traders improve their performance with his expertise in technical analysis, trading psychology, risk management, the trading process and developing a trading plan.
The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.