Choosing the Best Time Frame

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. There are many things to consider before deciding on which time frame is best suited to your personality and goals.

The longer-term position trader has a much simpler task of finding the ideal time frame. Unless the longer-term trader has online data and is sitting in front of the computer watching prices, the choice is simply 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 to run stops in those areas. This is most likely the reason breakout systems don’t perform as well as they used to. 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. The choice of a shorter time frame would mean an intraday chart, such as a 60 or 30 minute. This is not practical for traders with other activities requiring their attention during market hours, or for very large traders who can’t move in and out of markets quickly. Going the other direction 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. This blog mainly uses daily charts for the daily commentary. It would be difficult to update the blog with intraday charts and still do my own trading.

The short-term and 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, each with an almost infinite number of choices. Tick charts create a bar when a certain number of ticks are registered; therefore they are 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 day 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. On the minute based chart it is the rigid imposition of time that causes the bar to move, without taking into consideration the character of the market.

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. I couldn’t disagree more. 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. 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. Compare a 24-hour tick chart with a 5-minute day session chart and you will most likely see a huge difference in the smoothness of the cycles and trends on the tick chart, as compared to choppy action on the minute based chart.

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. You have to consider the amount of risk you want to assume on each trade, and how many trades you want to take in a day. The shorter times frames will obviously have many more traders per day, but will also have a much closer stop loss point. Another choice will be dependent on your data provider. Some data providers transmit a sampled data feed. To match a tick chart from one data vendor to another will often require a completely different tick setting. An 89-tick chart from one data provider might approximate a 233-tick chart from a different data provider that uses a full data stream.

Using tick or volume charts will more easily keep you out of the crowd and the noise. Also, regarding the choice between tick and volume charts: volume charts conceptually make more sense, but they are more difficult to trade. If a flurry of volume enters the market, the bars can be created and move over very quickly, making what seemed like an easy trade in hindsight, turn out to be a very difficult trade to actually make in real time. The tick chart can suffer from the same problem, but to a much smaller degree. Tick charts, in my opinion, are much easier to live with in real time. And tick charts display the market structure just about as well as a volume chart. For day traders, using a tick chart will go a long way to having an adaptive approach to the cycles and swings of the market, as the nature of the chart will adjust for highly volatile and quiet periods.

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 ticks 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 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 concept further.

One possible point of confusion when dealing with time frames is when a trader looks at many time frames simultaneously. I know many trading approaches are built on this theory. However, in real life trading, multiple time frames can be quite frustrating. As an example, it is common for the shorter-term time frame to just be giving a buy signal, while the longer-term time frame is still in a sell mode. By time the longer-term time frame comes around to the bull side, the shorter-term time frame is already rolling over and giving a sell signal. By time the shorter term is back on the buy side, the longer term is back on the sell side. 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%. There may be times when a market makes a smooth trend in the longer term, while the shorter term gives perfect cyclical signals on all the pullbacks, thus confirming the case for multiple time frame trading. However, I would suspect at many of these times more could be made trading either of the time frames independently. I know many trading educators would disagree with my assessment of multiple time frame analysis, but I’m not sure many successful traders would disagree.

After years of trying every imaginable time frame and combination of time frames, I’ve come to a few conclusions. I think it is best to treat each time frame independently. It is best to take both entry and exit signals from only 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 I think it is a mistake to do this. I know many traders will disagree with this. And, I think it is best to focus on only one time frame for any given market, and not even be tempted by having other time frames on the screen. Multiple time frame trading can cause confusion and analysis paralysis. You have to realize and accept the reality that many signals being generated by many of the other time frames will 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 a 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 then 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.

7 thoughts on “Choosing the Best Time Frame

  1. Thanks, Doug. I just discovered your very informative website with a link provided by MPlay’s new website.
    After two money-losing years with Woodie’s club, I had decided that I must be hopeless and incompetent. That may still be true to some degree, but your site is helping me realize that my own analytic ability is the ultimate trading tool.
    There is still hope.

  2. this seems some very good advice. i have been having that paralysis analysis recently.
    many thanks

  3. Doug:

    Thanks for the thoughts. I have been driving myself crazy lately with 1′,2′,5′,15′,30′ charts, all of this on a laptop with 3 technical indicators per screen! What a mess. Your so right about what time frame works one day, won’t work the next. A 5′ chart was perfect today, but often is not.

  4. After 1 year of live trading on my account, and after downloading dozens of training programs, yesterday night I came to same opinion as yours ! and just removed all time frame windows except M5.

    What I learned is that I have to Un-Learn many theories I learned in other courses and stick to one time frame. There are times when I can save a loss just by if I have 2 timeframes M5 and M15, but having these I could miss double the amount of profitable trades that I could have traded if I have only 1 timeframe chart.

  5. Thanks Doug! I’ve been researching on this subject of time frames but I’ve got to say that this is the best article I have read to address that issue. I choose to let go of the old ideology associated with focusing my trades on more than one time frame which has proved to be a long learning lesson without returns for my effort.

Comments are closed.