Skill Sheet: What You Will Learn Here
- What is a trading timeframe?
- Why is it important to choose the right timeframe?
- Common timeframes used by traders
- Pros and cons of long and short time frames
A trader, unlike an investor, seeks to make profits relatively quickly. For this, it is critical for traders to choose the right time frame they want to trade in. Time frame in trading refers to the duration for which a particular trend is witnessed in a stock. Traders take decisions backed by technical analysis; a method of forecasting future price movements based on historical prices.
So, choosing the right timeframe is crucial for trading. But what exactly is the ideal time frame?
Let’s look at some common time frames and trading styles
The style of trading is what defines a trader’s trading timeframe. Scalpers or momentum traders, for instance, will look to capitalise on small price movements and within very short timeframes ranging from a few seconds to a few minutes. They make sizeable trades and enter and exit quickly. They also typically have solid risk management to keep their capital safe.
The return for such traders may be less in terms of percentage and more in absolute value.
Intraday traders, on the other hand, have slightly bigger trading timeframes ranging from three minutes to an hour or even more. The primary goal of a day trader is to identify the most favourable set-up based on studies and strategies and enter a trade and exit with a profit the same day.
A day trader typically ends up executing lesser number of trades than a scalper as the trading timeframe is bigger and the chances of a setup repeating become less as the timeframe increases. For a day trader, the return can be better in terms of percentage but less in absolute terms.
Pros and cons of shorter and longer time frame in trading
A shorter timeframe provides a detailed view as sharper moves can be captured and capitalised. However, the disadvantage is that the sharper moves can be just noise, random movements, and an increase in terms of transaction and execution costs. On the other hand, a longer time frame gives a much better or cleaner picture by absorbing the noise. However, a longer time frame trader would have missed an opportunity if the stock had moved significantly in a shorter timeframe and came back and settled from where it began.
Common rules for intraday traders
It is better to avoid the first 15 minutes of the opening session. Indian equity market opens at 9:15 am. Therefore, it is better to avoid taking trades till 9:30 am. This is because the first 15 minutes of the opening session filter in lots of overnight news and events and can cause a lot of volatility resulting in wild swings.
Emotional traders end up reacting to news and events and end up being fodder for the more experienced and professional traders.
The first hour of the opening session from 9:30 am onwards is ideal for trading as it offers ample liquidity period for intraday traders. Liquidity is very important for a day trader for quick entry and exits.
Apart from this, institutional order flows happening during the first hour of the opening session provide liquidity and momentum. Institutions follow a protocol of buying or selling shares after a lot of deliberation, meetings, and analysis. By the first hour, the deliberations are done, and the order flows are communicated for execution. From 10:30 am onwards the markets lose momentum and move sideways. If a trader is caught in this timeframe or price range the wait for an exit can be quite long.
There is no universal fit as far as choosing a trading timeframe is concerned. It all depends on the trader's mindset and his expertise in reading charts. A trader with a higher degree of patience can choose a higher timeframe for trading his setups. While a trader who is nimble and has a resilient emotional setup can choose a shorter timeframe.