Trading Ideas: Choosing the Right Time Chart
We have dealt with many aspects of trading in this series of entries, but it is getting closer and closer to that time of truth to get in front of the computer to start taking our first trades. One of the first doubts that arise at that moment, and in fact it is a very important decision, is to choose the time scale on which we are going to trade the product in question.
In fact, it has little to do with choosing a graph of 1, 3, or 15 minute time increments. Each has its advantages and disadvantages, and the poor choice of the time scale may even invalidate a good trading system that would probably work on another chart. Just by saying that there are books dedicated solely and exclusively to the art of mastering the various temporal scales, I think we can get an idea of the magnitude of the matter.
Choosing a Time Scale
Broadly speaking, we must be very aware that the chosen time scale will determine the speed of our trading. If you engage in intraday trading, doing it on 1-minute charts will require a much faster analysis and reaction rate than doing it on a 5-minute chart. I do not think this point needs further explanation. It is important to have this factor in mind, as it will greatly condition our “stress” in the trade.
The second factor of relevance to consider is the amount of noise that can get into the fastest temporal graphs. In fact, the amount of impulses and pullbacks that will be drawn on a 2-minute chart will be much higher than those that will be drawn in a 15-minute chart. Generally, the lower temporal graphs give many more windows of opportunity to take trades, but a good number of them will be negative when dealing simply with market noise.
Do not lose sight of the filtering power of all this noise of the higher temporal graphs. They are much more noble in that sense, but in return, they give less opportunities to trade and are more spaced in time, so it is often possible, depending on your trading strategy, you might even get bored. This is something that is also extremely dangerous, because it can lead you to trade with the consequences you imagine to be true.
So, it’s much better to trade higher temporal charts, right? Well I’m going to give you the third and, for the moment, last factor that I wanted to deal with in this post: the necessary stop, and therefore, the volume of account you need to trade with guarantees a certain temporary chart.
The higher temporary charts will ask for a higher stop loss to protect your trades. This directly affects the risk you assume in each trade , and therefore the volume of account that you must have to exit for that risk is acceptable (1-2% of the total of the account at most). To be clear: for a trade over 15 minute increments, you probably need a stop of 20 ticks, while a trade in 3 minute increments, will require a stop (loss) of only 10 ticks.
As you can see, there are many factors to consider, and the key is to find the right balance for the product you are considering and your trading strategy. There is no standard rule that you can always apply, and there will even be products that are more appropriate to trade on tick charts than on temporary charts.
That said, here’s a tip. Personally, I like to use superior graphics to mark relevant levels of supports and resistances and establish market trends. I follow the development of the price in temporary charts of 5 minutes, normally, and only jump to temporary minor graphs to specify the entry in the trades and to be able to trade with a stop loss more adjusted. I usually trade with the graphics of 1 min, 3 min, 5 min, 15 min and 60 min open, and I move between them depending on how the market moves at that time and what product I am trading.