Can you choose the best time frame for day trading? Or is it pick one and stick with it? As soon as you start talking about time frames in trading, there’s quite a debate. Although you buy options on the same underlying stock or index, different traders choose which time frames they will use to trade options.
Day trading can be one of the most difficult strategies of finding profitability. Newer traders implementing a day trading strategy are exposing themselves to more frequent trading decisions that may not have been practiced for very long. This combination of experience and frequency opens the door for losses that might have been prevented had the trader opted for a slightly longer approach like swing trading.
The scalper or day trader is in the unenviable position of needing the price to move quickly in the direction of the trade. Therefore, the day trader becomes tied to the charts as they seek the market’s trends for that day. Obsessing over charts for long periods of time can lead to fatigue. The shorter-term approach also affords a smaller margin of error.
Generally, there is less profit potential in short-term trading which leads to tighter stops levels. These tighter stops mean higher probability of failed trades as opposed to longer-term trading.To trade with a very short-term approach, it’s advisable for a trader to get comfortable with a longer-term, and swing-trading approach before moving down to the very short time frames.
Resembling longer-term trading, day traders can look to evaluate trends on the hourly chart and locate entry opportunities on the ‘minute’ time frames such as five or ten-minute charts. The one-minute time frame is also an option, but extreme caution should be used as the variability on the one-minute chart can be very random and difficult to work with. Once again, traders can use a variety of triggers to initiate positions once the trend has been determined – price action or technical indicators.
Day trading example
60-Minute Time Frame
Swing-traders frequently use the 60-Minute time frame, but there is also the potential for profitable day-trades by combining this chart interval with a lower chart interval utilizing multi-time-frame analysis. One thing to keep in mind, the regular trading hours are from 9:30 a.m. to 4:00 p.m., and the first candle starts at 9:30. Therefore, the last 60-minute candle of a day only contains data of the last 30 minutes of the regular trading hours session from 3:30 p.m. to 4:00 p.m.
15 Minute Time Frame
The 15-minute time frame is probably the most popular interval for day traders focusing on multiple stocks throughout the day. The longer the watchlist, the higher the chart interval should be. You need to have a realistic chance to scan and analyze the current market behavior. If the chosen time frame is too low, and too many stock symbols are screened at a time, the chances of missing the best possible entries increases.
A 10- or 15-minute chart time frame is for someone who wants to see the major trends and movements throughout the trading day, not each little gyration (5-minute, and to a greater extent the 1-minute).
If you want to trade on a 15-minute chart, build and test the strategy on a 15-minute chart.
Trading on a 10- or 15-minute chart requires less constant focus because bars/candles are occurring over a longer period. If you wait for candles to close (don’t have to) then there is at least a 10 or 15 minute period between possible actions.
Traders on this time frame may only be taking one or two trades a day. If only trading during a two-hour or less window, many days may have no trade signals. Trading this time frame may require more time in front of the screen since it takes longer to get into and out of trades.
Stop losses and profit targets tend to be larger than on the 5-minute chart. This isn’t good or bad, but it does typically mean fewer trades per day.
Positions sizes are smaller than those on a 5-minute chart because candles are bigger on the 10 or 15-minute chart which likely means a greater stop loss distance.
Because of fewer trades and smaller position size it is easier to have multiple positions.
5 Minute Time Frame
High volatile stocks move fast, and traders who focus on only a couple of stocks a day use the 5-minute time frame frequently. The 5-minute chart is especially helpful in the first 60 minutes of a trading day. The time per candle is long enough to analyze the stock and to prepare the orders.
A 5-minute chart may work well for someone who focuses on bigger intraday trends and doesn’t need to see the open-high-low-close price every minute, but would rather get summary data over 5-minute periods.
If you want to trade on a 5-minute chart, build and test the strategy on a 5-minute chart.
Trading the five-minute requires focus, but less constant attention than the 1-minute chart. Candles are forming every five minutes, so there is more time between data points. If a trader waits for candles to close before acting, this means no action is taken for at least 5-minute intervals, and often longer.
5-minute chart traders tend to trade less than 1-minute chart traders because there are fewer data points (bars/candles) to act on. One or two trades may develop in a two-hour trading window, possibly more, but less than on the 1-minute.
Stop losses and profit targets tend to be larger than on the 1-minute chart. This isn’t good or bad, but it does typically mean fewer trades per day.
Positions sizes are smaller than those on a 1-minute chart because candles are bigger on the 5-minute chart which means likely a greater distance between the chosen entry and exit.
Because position sizes are a bit smaller than the 1-minute chart, traders may be able to have multiple positions at the same time. Again, you can always allocate a specific amount to each day trade to assure there is enough capital for all the positions you wish to take.
1-Minute Time Frame
Trading in short-term time frames such as the 1-minute chart requires discipline and an excellent understanding of the market structure. You need to know what you are looking for. For example if a highly volatile stock breaks the previous day high with high momentum, chances increase that the next higher low in the 1-minute time frame allows you to open a trade with low risk and high potential.
A 1-minute time frame may work well for someone who likes seeing detail in the price movements and potentially getting in and out for short-term trades that only last a few minutes.
If you want to trade on a 1-minute chart, build and test the strategy on a 1-minute chart.
Trading the one-minute requires nearly constant attention while trading, since bars/candles are generated every minute and trade signals can occur often (depending on the strategy).
Because price bars occur frequently, 1-minute chart traders typically have the opportunity to take more trades per day than larger time frames. With a winning system, more trades means more profit and faster compounding of the account. With the potential for more activity, a trader who doesn’t have a winning strategy can lose their capital rapidly.
I used a one-minute chart to day trade the EURUSD every day. I trade for about 2 hours per day. Here’s the strategies and tactics I use.
It is possible to make several trades within a two-hour window. Nice if you don’t want to spend too many hours in front of your screen.
With trades based on smaller candles (than the higher time frames) stop losses and profit targets tend to be smaller than those used by higher time frame traders. This doesn’t have to be the case, though. A trader could use a small stop loss on the 1-minute chart and aim for large reward:risk trades. Waiting for larger profits may mean less trades throughout the day.
Because of the potential for small stop losses, position sizes can be very large.
Forex position sizing may reach 10, 20, or 30x leverage…while still keeping risk on the trade to less than 1% of the account balance. Many forex brokers offer 30x to 50x leverage (or more in some countries).
Position sizing for day trading stocks is capped at 4x leverage. This means much of the capital in the account, including the maximum leverage, can quite easily be used even when risking only 1% or 0.5% of the account on a trade (don’t need to risk that much, can risk less). One day trading position may use most of the available capital in the account, leaving little for other trading activities, such as swing trades. You can always choose to allocate a specific amount to day trades, and leave the rest of the capital for other trades.
Multi-Time Frame Analysis
Trading against the primary trend is a big trap that new traders fall into. Often, the higher time frames are not considered at all. The right way is to work from the highest time frame to the lower one to spot entries with a high profit potential. If the current price is above the previous day high, above the 60-minute opening range, and with higher lows and higher highs all over the place, the sentiment is bullish. Shorting such stocks is against the trend, and the chances are that a short squeeze will lead right to the next high. The higher time frames determine the trend, and it is the most profitable approach to trade with the trend until it’s broken.
Conclusion
Day trading is an investment strategy that seeks to capitalize on short-term market price movements by taking advantage of intra-day price changes. Traders with this approach track market data captured at frequent time intervals, usually throughout the day. The approach is generally characterized by holding positions for a short period of time, with most day traders getting into a position with the intention of closing it before the end of the trading day.