According to my reckoning, this article should take around 4 minutes to read.
I’m going to make the assumption that, while you read this, you’re not traveling at or near to the speed of sound. So, I’ll assume that a minute for you is much the same as a minute for me.
But then let’s say that there are nine other people reading this email at exactly the same time as you. A minute of me wittering on, is going to take up 10 minutes of your collective time. (Apologies for that.)
A minute of time on Twitter is probably around half a million tweets.
It’d take months to read all those.
A hundred and fifty years ago, people didn’t think in “decades” – by which I mean the “swinging sixties” or the “roaring twenties” or the “naughty nineties” (1890s that is). But now we all have a neat picture in our heads of what each decade looked like.
These days, our cultural snapshots have honed into even shorter timeframes – like the length of a trend on Twitter.
Something’s important for a few hours or days, then it’s gone.
A computer engineer has to think in nanoseconds.
If this email were as long as the 20th century (don’t worry, it isn’t), sliced bread would have just been invented.
When we log on to our spreadbetting accounts, we have the strange ability to slow time down or speed it up…
Just by adjusting the timeframe on our charts.
If we look at 1-minute charts, things are happening so fast that we can’t afford to nip off to make a cup of tea.
If we look at weekly charts, we’ll have time to take a holiday between glances.
So, how on earth do we know which chart is the right one for us to be looking at?
And are there timeframes that are fundamentally better than others?
Selecting a timeframe has to be done with reference to the type of trading you’re doing.
If you already know whether you’re scalping, day trading, swing trading or a long-term currency trader, then the answer will be easier to find.
But perhaps you don’t yet know the answer to that question.
How many hours can you dedicate to trading?
Do you want to spend all day trading? Or an hour or two a day? Or just trade once a day? Or once a week?
How much money do you have to invest?
It’s generally regarded that taking long-term positions the most profitable form of trading, but you need to be able to ride substantial market moves – and this means you’ll need deeper pockets.
Here’s a very simplified picture of the different types of traders, and the timeframes they are likely to follow…
A scalper takes his profits from small currency fluctuations, generally staking high, but looking for just 5–10 pips at a time. A true scalper needs to be confident that they have fast market access so that they can get in and out of positions quickly. Despite having tighter profit targets, the scalper will be paying the same costs to his broker as the daytrader, which means that he is cutting his margins tight. Timeframes: 1 minute, 5 minute and 15 minute.
Daytraders will generally open and close all their trades within the space of one day. Positions may be held for a few minutes or a few hours, looking for moves anywhere from 10 pips to 100 pips. Most online currency traders are daytraders. Timeframes: 5 minute, 15 minute and 60 minute.
Swing traders are looking to profit from larger market moves than daytraders, holding positions for several days (although it could be anything from a few hours to a few weeks, depending on how the markets behave.) Timeframes: 60 minute, 4 hour and daily.
A long-term trader isn’t picking up profits from the bumps in the charts, instead, he’s following a long-term price trend. Positions can be open for months or even years. Timeframes: daily and weekly charts.
Signs that you’re trading the wrong timeframe
Don’t worry if you don’t feel that you fit neatly into one of these categories. Most traders will have a natural place in the timeframes that feels right for them.
However, the sooner you match the timeframe to your trading style, the better, as mismatched trading and timeframes can lead to some expensive mistakes.
You should be able to tell if you’ve got your timeframes wrong. If they’re too long, you won’t be able to find the action you’re looking for. If they’re too short, the action will happen so fast that you’ll miss it!
There’s nothing inherently better or worse with any particular time frame.
Many daytraders and scalpers believe that trading shorter timeframes will make them more money, because there are more opportunities. However, shorter timeframes are full of “noise” – the ups and downs that simply can’t be predicted.
So, a shorter timeframe may give you more trades – but it may also give you a lower success rate. Whereas a signal on a longer timeframe (while it comes along less often) tends to be more reliable.
And, of course, once you’ve found a timescale that suits you perfectly… it’s the moment to start exploring multiple timeframe analysis… but I’ll save that for another week…
In the next seven days…
After the final knees-up on Davos’ Magic Mountain on Saturday night, economic big wigs will be heading home on Sunday morning. So what do they have to look forward to…
The main UK data next week will be the net lending figures from the Bank of England on Wednesday. These are expected to show that companies are still repaying debt, and that household borrowing is flat. It’s difficult to create growth in this kind of environment.
European data on Monday is likely to be similar, which will explain disappointment in retail sales and PMI figures next week.
For the US, next week’s focus is on housing. Home sales (Monday) and house prices (Tuesday) are expected to be strengthening. GDP figures on Wednesday should show an annualized growth of around 1.5%, and Friday’s non-farm payrolls could show an extra 160,000 new jobs.
As I write this, the UK GDP data has just come out at -0.3% – bad news for George Osborne, and the pound has taken an tumble, but markets will probably take a pretty pragmatic view.