Best Time Frame To Trade Forex
The Two Blokes Learn to Trade #3
How Long Should I Hold My Trades?
For new forex traders one of the first questions you need to answer is: ‘What is the best time frame to trade forex’’? The same applies for shares or commodities, or whatever you trade. When you consider the fundamental importance of this decision on the nature of trading, this question effectively becomes: what sort of trader should I be?
I don’t mean, will I trade Forex or Indices. But rather, will I trade over a short time frame or a long time frame, or somewhere in between. After a little research a new trader will realise that the answer to that question has far reaching consequences on all the other aspects of their trading. What they choose to be the time frame to trade Forex on, whatever it is that motivates their choice, will impact on all other aspects of their trading. This could be what assets they trade, the trading strategy they use, their risk management principles and the expected effort and rewards. Most importantly it will impact the skill level required and how likely they are to succeed.!
Best Time Frame to Trade Forex - Four Main Choices
As detailed in Episode 51, when we started the Traders Support Club course, one of the first videos we watched touched on this subject. You’ve got to make this decision before going any further. In that spirit, before going any further with this post, I’ll outline for those that don’t know what the four choices are. There are, broadly speaking, four different time frames to trade Forex. In order, from shortest to longest, they are:
Scalping is trading over very short time frames, potentially as short as a few seconds. It might be as long as a few minutes. Scalpers will be looking to bag multiple small profits over the course of a day. Scalping will usually take the form of technical trading and is typically where people are looking for a predictable, repeatable pattern or price behaviour that they can take trade very quickly. Advanced strategies may feel a bit like ‘gaming’ the system and be based on taking advantage in inefficiencies in brokers’ pricing or the bid / offer spread.
Profit targets will be less than 20 pips usually and sometimes much smaller. Scalpers will need a broker that has very fast execution of trades and low spreads. The spread will be an unusually large percentage of a scalp trade. If you are looking for 10 pips profit on a trade and the spread is 1 pip with one broker and 2 pips with another broker, then that is a 10% difference in the potential profit of every trade you take!
Day trading, is defined very simply as a trading strategy which rarely sees a trader hold positions overnight. Scalping is a form of day trading, but is usually thought of as separate from other day trading methodologies. In reality quite a few day trading strategies see trades being held across a two day period. Any longer than two days and you are not really day trading. Day traders will look to be placing multiple trades in a day, but probably not the double figures that you may see with scalpers. When I day trade I am typically placing two to three trades a day.
Swing trading takes place from two days to up to about three weeks. Swing trading strategies can be similar to day trading strategies. The patterns sought can be looked at on longer time frame charts - maybe using the 4 hourly or daily chart rather than the 15 minute or 5 minute chart that day traders might use. Swing traders will look to place a number of trades in a given week. That number will probably be in the single figures, but you’d expect to be placing more than one or two trades a week.
The term Swing trading can be confusing as some people take it to mean a specific strategy or set of strategies, rather than a trading time frame. Some corners of the internet refer to Swing trading as a type of day trading that relies on picking momentum assets that build in a trend over a few days or a week. We will stick to the more common definition for swing trading: trading (whatever the strategy) by holding trades from two days to three weeks.
Position trading is the form of trading that has the most in common with traditional investing. Position trading involves taking a trade and holding it for time frames from two or three weeks through to months or maybe even years. This is the lowest intensity form of trading and will typically (but not always) involve a touch of fundamentals trading as well as technical trading.
Shares traders often have longer outlooks than Forex traders who tend to trade shorter time frames with greater leverage, looking for greater returns. The Forex markets are so volatile that it is less common to see Forex traders holding leveraged positions for weeks or months. With the general expectation that stocks and commodity prices will rise over time, or at least move in cycles, these assets often lend themselves better to this longer term trading. But, as with all things in trading, these are generalisations and there will always be exceptions to the rule!
Why a lot of people end up day trading first.
When we first got into trading, both Tom and I instinctively looked at the shorter time frames. I looked at normal day trading, sometimes having a position open overnight, but usually being in and out within a day. If I had to hold a position over a weekend I got full-blown anxiety! Listen to some of our earlier episodes to hear Tom lambasting me for not having a ‘system’ to deal with this weekend anxiety!
Tom also day traded initially and even looked at some very short term scalping methods - looking for 10-15 pips at a time. Well, almost scalping - maybe just very short term day trading! All of this is quite subjective so probably depends on your personal perspective!
This seems to be a common theme for a lot of traders. Maybe people who are more attracted to trading than traditional buy-and-hold investing, or handing their money over to a fund manager, are naturally geared-up to seek the action of day trading? Certainly Tom and I thought that our learning curve would be accelerated by trading more frequently.
I think it also may be indicative of Forex’s grip on traders’ mindsets that pushes people to day trading. Forex is a highly volatile marketplace, where the trend can reverse several times a week, or even a day! That makes it a bit more tricky to trade the longer timeframes than, a stock or index that may move in the same direction without much volatility for a long time. Lots of new traders are initially attracted to Forex, and Forex’s natural environment is day trading.
Graduating to Swing Trading?
Having watched the Traders Support Club video I started to question my status as a ‘Day Trader’ in a way that I hadn’t before. I’ve never had a desire to ‘scalp’ as it just seems so ridiculously labour intensive. But if I can put together a trading robot in the future (probably using this course!) then I have an idea of a strategy I might use…
But equally, I never had any desire to be spending weeks on analysis in order to place one trade and then watch it play out over weeks or months. Quite frankly, I don’t have enough capital to make trading a few times a year financially worthwhile, unless I risked a ridiculous amount on each trade! So position trading is out, for me at least.
But, the more I thought about Swing Trading, the more it appealed. This is inherently a personal thing, and it is not my intention to suggest to anyone that they should mirror my actions. But, once it became clear that Traders Support Club recommend Swing Trading as the initial strategy for most new traders, it really got me thinking.
As people that read my last post in this series will know, I am struggling with the discipline needed to properly execute a day trading strategy. Not from a trading rules perspective, but from a trading routine perspective. Running Two Blokes Trading with Tom, writing things like this, looking after my family and other business interests...on occasion trading finds itself squeezed out! Swing trading seems to offer the active trading style that I enjoy, but with a much lower time requirement. I don’t have to sit in front of the screens all day every day and try and fit my entire life either side of the London session! I know it is not an excuse to be lazy, but right now, like most people, I am trading around other commitments.
Trading Skill Levels and Success Expectancy
Also telling were the ‘skill levels’ that Traders Support Club assign to the different trading style. Position Trading: Level 3, Swing Trading: Level 5, Day Trading: Level 7, Scalping Level 10.
I had clearly jumped right in at the deep end. Although I feel that I am slightly beyond a level 3, I am not convinced that I am yet at a level 7! So, somewhere in the middle, for now, suits me just fine.
Anecdotally, from the people I had spoken to from the TBT community and the traders that I had interviewed on the podcast, it seemed that longer term success was often found with longer timeframe trading. The ‘chatter’ on the internet seemed to back up the idea of trading being harder to crack the shorter your time frame.
Short of hacking into a broker and looking at their data I am not sure if there is anything I can do to verify this hunch. But, the consensus seems to be that around 90% of day traders lose money. I would be very surprised if 90% of people lose money investing in a pension that buys blue chip shares over 40 years...Possibly this is a slightly facetious example, but it illustrates that the shorter term your trading is, the more difficult it will be, and the lower your expectancy of success. Particularly if you are a beginner!
You still need a strategy
I will be looking to make the transition to Swing Trader over the coming weeks, at least initially. I figure if I can master the “easier” form of trading then maybe I can go back to day trading at some point. For now, my only desire is to see my trading account consistently grow. If I have more chance of seeing that happen with Swing trading then so be it.
However, what is still abundantly clear, is that I will still need a demonstrable, proven strategy to make Swing trading work. It is not going to be a walk in the park, even if I am taking the pressure off slightly.
I am looking forward to getting into the meat of the training videos and webinars in the next couple of weeks and putting together a back tested trading strategy that will hopefully set me on the track to consistent profits as soon as possible.