Which Time Frame Should You Use in Trading?
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One reason why traders abandon their trading plans is that they have acquired new information that weakens their original trade bias.
They lose confidence in their initial plan and then take the wheel in their own hands to minimize risk.
Unfortunately, this strategy won‘t work if you apply the new information to a time frame that's different from the one you used in your original trade idea.
Like any high-performance endeavor, how traders process information is important in acquiring expertise.
Doctors, for example, look at symptoms and test results to pinpoint whats wrong with their patients. Similarly, traders look at market environment, chart levels, and the fundamental picture before settling on a trade idea.
Expertise in trading can be divided into two forms: short-term and long-term trading.
Scalpers dont have the luxury of evaluating a bajillion factors before making a decision. They have to process (and act on) information that they have, recognize patterns, and make decisions on the fly.
Position traders, on the other hand, have time to process more information before reaching a decision. They can look at market trends, consult more technical indicators, and generally prepare for more scenarios before entering a trade.
Longer time frames require more deliberation and planning while short-term trades need quicker information-processing systems and execution. The former relies on planning, the latter on "instinct."
Problems arise when traders mix up the two information-processing systems. That is, they enter trades using one set of parameters but manage them using information thats more apt for the other form of information-processing.
A long-term trader, for example, could exit a trade on the back of a single economic report, while a scalper could let his losers run when hes confident that the longer-term trends would eventually push price in his favor.
Its traders who use time frames that are somewhere in between scalping and position trading who often face this challenge. After all, they not only have to react to market changes in real-time, but they also have to understand how the changes fit in the bigger picture.
Basically, theyre trading a time frame that requires TWO forms of expertise. The instinct to react often clashes with the desire to weigh in new information before making decisions.
This is why some traders miss out on a good trend because they failed to find entry levels, while others jump in on a trend at the worst possible opportunity.
One way to avoid mixing up your analyses is to manage the trade using the same thought process used in locking in the trade idea.
If your trade is based on an uptrend on the 1-hour chart, then you shouldnt hold on to it if the pattern gets broken (even if you THINK that the pair will eventually go back up).
Likewise, a single market event shouldnt spook you out of your swing trend trade unless said event was a game-changer.
