Choosing A Suitable Trading Timeframe
Trading timeframe is as important as the trading strategy itself. Selecting the right timeframe for trading will affect how long does one hold onto their trades and also the profitability of the strategy. If you prefer to do scalping where this is a strategy that the trader would like to enter and exit the market quickly by taking a small profit (or loss). A swing trader whereas would prefer to hold the trade over a couple of days before the trade closed.
Before we decide the type of trader we are whether we are a scalper, swing trader or even intraday trading, we should really understand the market that we are trading, its spread and its volatility.
First and foremost, we would want to pick a market that we are familiar with, have tested the strategy over certain period and understand the fundamentals in that market. Next, we would want to look at the spread of the market. If we are looking at an H1 timeframe (1 hour for each candle) for instance, EURUSD, which has a spread of, let’s say, 2 pips (20 points) and we are taking 50 pips profit for each trade with our strategy, we may not be looking at a very profitable timeframe.
That is why we would need to check the third component which is the volatility or the range of movement of the market. Returning to the same example above, average daily volatility is about 50 – 60 pips (Oct 2020) and since we are taking 50 pips profit for each trade, the strategy attempts to take a full range of that day’s movement which is from the top to bottom or vice versa. It will be very difficult for any individual to be able to take a full range of movement or volatility on a consistent basis.
Therefore, we may need to look at a higher timeframe and holding the trade longer to achieve 50 pips target. H4 might be a suitable timeframe as the average weekly volatility is about 187 pips (Oct 2020) where a 50 pips target profit would be about 26.7% of its weekly movement. Which brings us to this point, where this type of strategy or target profit for this market would be more suitable for a swing trader.
Hence, choosing the right timeframe for your strategy may affect your potential to make profit. One good way to check for volatility and range is by using an indicator called Average True Range (ATR). ATR is a type of volatility indicator and gives the average of a range for that timeframe. ATR can be a very useful indicator to set target profits (TP) and stop losses (SL) as we can have a dynamic TP and SL levels using volatility as a reference.