What are some things that separate a good trader from a great one? Guts, instincts, intelligence and, most importantly, timing. Just as
there are many types of traders, there is an equal number of different
time frames that assist traders in developing their ideas and executing
their strategies. At the same time, timing also helps market warriors
take several things that are outside of a trader's control into
account. Some of these items include position leveraging, nuances of different currency pairs,
and the effects of scheduled and unscheduled news releases in the
market. As a result, timing is always a major consideration when
participating in the foreign exchange world, and is a crucial factor
that is almost always ignored by novice traders. Want to bring your trading skills to the next level? Read on to
learn more about time frames and how to use them to your advantage. Common Trader Time frames In
the grander scheme of things, there are plenty of names and
designations that traders go by. But when taking time into
consideration, traders and strategies tend to fall into three broader
and more common categories: day trader, swing trader and position trader. 1. The Day Trader Let's begin with what
seems to be the most appealing of the three designations, the day
trader. A day trader will, for a lack of a better definition, trade for
the day. These are market participants that will usually avoid holding
anything after the session close and will trade in a high-volume
fashion.
On a typical day, this short-term trader will generally aim for a quick turnover rate on one or more trades, anywhere from 10- to 100-times the normal transaction size. This
is in order to capture more profit from a rather small swing. As a
result, traders who work in proprietary shops in this fashion will tend
to use shorter time-frame charts, using one-, five-, or 15-minute
periods. In addition, day traders tend to rely more on technical
trading patterns
and volatile pairs to make their profits. Although a long-term
fundamental bias can be helpful, these professionals are looking for
opportunities in the short term. (For background reading, see Would You Profit As A Day Trader? and Day Trading Strategies For Beginners.)
Figure 1
Source: FX Trek Intellicharts
One such currency pair
is the British pound/Japanese yen as shown in Figure 1, above. This
pair is considered to be extremely volatile, and is great for
short-term traders, as average hourly ranges can be as high as 100 pips.
This fact overshadows the 10- to 20-pip ranges in slower moving
currency pairs like the euro/U.S. dollar or euro/British pound. (For
more on pairs trading, see Common Questions About Currency Trading.)
2. Swing Trader Taking
advantage of a longer time frame, the swing trader will sometimes hold
positions for a couple of hours - maybe even days or longer - in order
to call a turn in the market. Unlike a day trader, the swing trader is
looking to profit from an entry into the market, hoping the change in
direction will help his or her position. In this respect, timing is
more important in a swing trader's strategy compared to a day trader.
However, both traders share the same preference for technical over fundamental analysis. A savvy swing trade will likely take place in a more liquid currency pair like the British pound/U.S. dollar. In the example below (Figure 2), notice how a swing trader would be able to capitalize on the double bottom that
followed a precipitous drop in the GBP/USD currency pair. The entry
would be placed on a test of support, helping the swing trader to
capitalize on a shift in directional trend, netting a two-day profit of
1,400 pips. (To learn more, read The Daily Routine Of A Swing Trader and Introduction To Types Of Trading: Swing Traders.)
Figure 2
Source: FX Trek Intellicharts
3. The Position Trader Usually the
longest time frame of the three, the position trader differs mainly in
his or her perspective of the market. Instead of monitoring short-term
market movements like the day and swing style, these traders tend to
look at a longer term plan. Position strategies span days, weeks,
months or even years. As a result, traders will look at technical
formations but will more than likely adhere strictly to longer term
fundamental models and opportunities. These FX portfolio managers will
analyze and consider economic models, governmental decisions and
interest rates to make trading decisions. The wide array of
considerations will place the position trade in any of the major
currencies that are considered liquid. This includes many of the G7 currencies as well as the emerging market favorites.
Additional Considerations With
three different categories of traders, there are also several different
factors within these categories that contribute to success. Just
knowing the time frame isn't enough. Every trader needs to understand
some basic considerations that affect traders on an individual level.
Leverage Widely
considered a double-edged sword, leverage is a day trader's best
friend. With the relatively small fluctuations that the currency market
offers, a trader without leverage is like a fisherman without a fishing
pole. In other words, without the proper tools, a professional is left
unable to capitalize on a given opportunity. As a result, a day trader
will always consider how much leverage or risk he or she is willing to
take on before transacting in any trade. Similarly, a swing trader may
also think about his or her risk parameters. Although their positions
are sometimes meant for longer term fluctuations, in some situations,
the swing trader will have to feel some pain before making any gain on
a position. In the example below (Figure 3), notice how there are
several points in the downtrend where a swing trader could have
capitalized on the Australian dollar/U.S. dollar currency pair. Adding
the slow stochastic oscillator, a swing strategy would have attempted to enter into the market at points surrounding each golden cross. However,
over the span of two to three days, the trader would have had to
withstand some losses before the actual market turn could be called
correctly. Magnify these losses with leverage and the final profit/loss
would be disastrous without proper risk assessment. (For more insight,
see Forex Leverage: A Double-Edged Sword.)
Figure 3
Source: FX Trek Intellicharts
Different Currency Pairs In addition
to leverage, currency pair volatility should also be considered. It's
one thing to know how much you may potentially lose per trade, but it's
just as important to know how fast your trade can lose. As a result,
different time frames will call for different currency pairs. Knowing
that the British pound/Japanese yen currency cross sometimes fluctuates
100 pips in an hour may be a great challenge for day traders, but it
may not make sense for the swing trader who is trying to take advantage
of a change in market direction. For this reason alone, swing traders
will want to follow more widely recognized G7 major pairs as they tend
to be more liquid than emerging market and cross currencies. For
example, the euro/U.S. dollar is preferred over the Australian
dollar/Japanese yen for this reason.
News Releases Finally,
traders in all three categories must always be aware of both
unscheduled and scheduled news releases and how they affect the market.
Whether these releases are economic announcements, central bank press
conferences or the occasional surprise rate decision, traders in all
three categories will have individual adjustments to make. (For more
information, see Trading On News Releases.)
Short-term
traders will tend to be the most affected, as losses can be exacerbated
while swing trader directional bias will be corrupted. To this effect,
some in the market will prefer the comfort of being a position trader.
With a longer term perspective, and hopefully a more comprehensive
portfolio, the position trader is somewhat filtered by these
occurrences as they have already anticipated the temporary price
disruption. As long as price continues to conform to the longer term
view, position traders are rather shielded as they look ahead to their
benchmark targets. A great example of this can be seen on the first
Friday of every month in the U.S. non-farm payrolls
report. Although short-term players have to deal with choppy and rather
volatile trading following each release, the longer-term position
player remains relatively sheltered as long as the longer term bias
remains unchanged. (For more insight, see What impact does a higher non-farm payroll have on the forex market?)
Figure 4
Source: FX Trek Intellicharts
Which Time Frame Is Right? Which
time frame is right really depends on the trader. Do you thrive in
volatile currency pairs? Or do you have other commitments and prefer
the sheltered, long-term profitability of a position trade?
Fortunately, you don't have to be pigeon-holed into one category. Let's
take a look at how different time frames can be combined to produce a
profitable market position.
Like a Position Trader As
a position trader, the first thing to analyze is the economy - in this
case, in the U.K. Let's assume that given global conditions, the U.K.'s
economy will continue to show weakness in line with other countries.
Manufacturing is on the downtrend with industrial production as
consumer sentiment and spending continue to tick lower. Worsening the
situation has been the fact that policymakers continue to use benchmark
interest rates to boost liquidity and consumption, which causes the
currency to sell off because lower interest rates mean cheaper money.
Technically, the longer term picture also looks distressing against the
U.S. dollar. Figure 5 shows two death crosses in our oscillators, combined with significant resistance that has already been tested and failed to offer a bearish signal.
Figure 5
Source: FX Trek Intellicharts
Like a Day Trader After
we establish the long-term trend, which in this case would be a
continued deleveraging, or sell off, of the British pound, we isolate
intraday opportunities that give us the ability to sell into this trend
through simple technical analysis (support and resistance). A good
strategy for this would be to look for great short opportunities at the
London open after the price action has ranged from the Asian session.
(For more, see Measuring And Managing Investment Risk.)
Although
too easy to believe, this process is widely overlooked for more complex
strategies. Traders tend to analyze the longer term picture without
assessing their risk when entering into the market, thus taking on more
losses than they should. Bringing the action to the short-term charts
helps us to see not only what is happening, but also to minimize longer
and unnecessary drawdowns.
The Bottom Line Timeframes
are extremely important to any trader. Whether you're a day, swing, or
even position trader, time frames are always a critical consideration
in an individual's strategy and its implementation. Given its
considerations and precautions, the knowledge of time in trading and
execution can help every novice trader head toward greatness.
