Blog / Time-Frame And other aspects of trading
Time-Frame And other aspects of trading
Traders constantly try to improve their market participation occasionally ask the question:
What is the appropriate time-frame for me after taking into account the present situation?
Of course this depends on a lot of things like the following:
- What is my objective with my market participation?
- How much time am I willing to allocate to reach my objective?
- How much capital do I have?
- What kind of market experience do I have?
- What kind of edge do I have on the market?
- How much stress level am I willing to endure during market participation?
Even after answering many questions some traders might conclude and select the wrong direction, due to many seemingly unimportant details.
One of that is the brokerage commission, and the slippage, that is associated with trades, executing market orders.
The more trades you do on a yearly basis, the more stress you need to endure.
The following table shows a hypothetical example for the brokerage costs for a trader on different time-frame.
Assumption was in the calculation, that the trader pay 16 $ for a round trade.
The brokerage fee could accumulate to a horrendous level for a scalper or Day – trader.
The most important is not actually the brokerage fee, but the Ratio of the Yearly brokerage fee to your trading Capital.
If you pay 50 000 $ a year for brokerage fee, and you are playing the market on a 1 Min time – frame, having a 50 K account and playing all trades with a 100% allocation, than basically the yearly brokerage commission is equal to 100% of your Capital, and the probability to stay consistently on the winning camp is very close to zero.
A rule of thumb might be that yearly brokerage fee should be less than 10 - 15 % of the trading account, to have a fair chance to stay consistently in the winning camp.
Depending on the trading style, trade execution, the total Yearly slippage can be as big or even bigger than the total yearly brokerage fee. For this reason try to minimize the market orders by putting in limit orders if reasonable, exercising more control over the trade.
Time-frame is only a construction, abstraction level, that helps to visualize the market action through chart creation.
The actual market behavior is a constant flow of trades regardless of one specified time-frame, as a construction of endless time-frames put together.
Opportunities show up on different time-frames. Some of the most successful traders participate in the market by taking the opportunities on different time-frames, even if they might have one selected time-frame which bring in the bulk of the yearly profit, other time-frame plays might add to the bottom line.
Predictionwizard support playing the market on multiple time-frames.
One example is if the market trading in a tight range for a prolonged period of time, say many weeks or months, and suddenly breaks out and move decisively on very high volume, compared to the average volume within the range. In this situation playing the 1,2,3,5 minute time-frames could be successful, but we probably will limit the potential of the total yearly profit by restricting ourselves to trade only this very short-time-frame.
But trading opportunities on multiple time-frames usually not the way, newbie, novice traders can successfully participate, as it requires much more trading experience.
Few traders consider the energy level or mental strength as another extremely important component, in addition to our trading capital. But that also should be in the picture, when we constantly evaluate our market participation.
One example:
A Day-Trader working 9 hours a day, starting 1.5 hours before the market open, trading during the daily market period (6.5 hours) and still working 1 hour after the market closed.)
This intensive market participation could be continued for a weeks, months, or even for a few years but probably not for many years without long interruptions.
By analyzing the trading results we see, that 90% of the yearly profit came in during the first 60 minutes of the regular market session and the last 90 minutes of the regular market session.
So this trader gets 90% of the yearly profit by watching the monitor(s) 150 minutes, and get the remaining 10% by sitting and watching the market for another (240 – 360 minutes, depending on how much we consider in the pre-market / after-market period)
Does it worth to deplete / kill our mental energy level by following the market all day, when we do not have the added benefit? Probably not. In this case spending 60 % of the time in front of the monitors for the 10% added profit level. Some of the biggest market players know this, and stay away from the market when it is slow or does not show good potential reward.
We can even define market status, what we would consider low potential periods, when we take a rest and not following the markets.
After this introduction we would like to highlight two very important aspects of our market participation, that every trader try to constantly improve, with more or less success.
These are:
1. WIN PROBABILITY
2. RISK / REWARD RATIO
These two are measures and considered the crucially important aspects of our market participation.
We can’t improve win Pct directly, but we can improve our market participation strategy, or mental fitness, our trade execution… to ultimately improve these two measures.
To demonstrate the impact of these measures we created the following table with 20 different strategies.
In the table presented below we would like to see the impact of the win probability at 50%, 60%, 70% and 80%. Anything above 80% is a gratis, and might not be possible to maintain for very long period of time. Also we would like to see the impact of the Risk / Reward at different values, like 1/ 1.33 1 / 2, 1 / 2.5, 1 / 3, 1 / 4
Analyzing the table the crucial importance of these numbers will become obvious:
A trader, with 50% Win rate and 1/2 Risk / Reward is a Good trader, but gets only 50 profit units out of 100 Trades, BUT an excellent trader, who manage to get 80% Win rate and 1/3 Risk / Reward, gets 220 profit units out of 100 trades -> The difference is a whopping 19.36 / 1 in only two years (220/50 exp 2 OR 4.4 exp 2) between these two traders. (Assuming they do 100 trades a year)
So if the first trader get 1 Million, the other trader get almost 20 million during the traded two years using the same money available! The Risk / Reward ratio and the Win Pct is that IMPORTANT, the CRUCIAL aspects of trading!