Trading short term time frames and moving averges in a trend pt.2

How does TIME effect your trading?

This is not just limited to the time you enter the trade, although that is certainly going to impact your trade because of typical pip movement during the time of day and economic events.

This is not just limited to the day either. Did you know that certain days have different average pip movement ranges?

This is not even just limited to the time frame. It’s all three.

All three effect the volatility and therefore the potential upside and downside of an entry. The time frame itself is one of the most important and often the most overlooked. Consider time frames like a slice of psychology. The bigger the time frame – the bigger the slice. The bigger the slice – the most chance for a wider pip range.

I think that visually and intuitively most trades already know this. If I were to ask you to walk as far as you could in 30 minutes or in four hours, which would allow you to cover more ground? Four hours ofcourse. So apply this same thinking to time frames. Prices are simply — if given more time – be bale to cover more ground on the price chart.

Let’s consider patterns. If a fifteen minute chart developed a triangle it will inherently be smaller than a triangle formed on a four hour chart. The four hour candles will have a bigger pip movement range per candle and it’s these (typically) larger candles that will form the pattern.

Bringing this back to daytrading and the five minute chart: The time frame is not simply a risk management choice so don’t get hung up on the shortness of the time frame…although ofcourse a single lot of a five minute set up is going to present different risk, reward, support, resistance, and trend implications than a longer time frame such as even a 15 or 30. Remember the time frame effects trade frequency, follow-through, and psychology. Over the course of an hour, a five minute chart could cycle through all four market cycles. This for even a 15 minute chart would be all but impossible. I should mention that one of the beliefs of my trading set ups is that they would on any and all time frames. So even though I am outlining a very short term time frame here, as long as same steps are followed, this could would on any time…15, 30, 60, 240, daily…The main idea is to recognize a trend and play corrections within the trend. I’ll show you the set up in part three, it’s really simple, and the trade management in part four using Fibonacci extensions.

Let’s finish our talk on time with the following graphs to illustrate what I am trying to get across about time frames and pip movement. I use the EUR/USD show you the importance of time. Remember that each pair has nuances all it’s own though! In fact let’s start with a broad view as I show you many popular pairs and cross-rates and their respective daily pip movements:

11-6-2009 6-52-06 AM.gif

Here’s a look specifically at the EUR/USD with a one month sample of hourly pip movement:

11-6-2009 6-55-03 AM.gif

Now take a look at the chart with the hours that you should avoid — due to low pip movement — highlighted.

11-4-2009 11-36-20 AM.gif

Finally this last chart makes the point have been referring to for much of this article: How different time frames present different amounts of pip movement:

11-6-2009 6-58-35 AM.gif

Ok so this concludes part 2 and a look at pip movement. I think regardless of your methodology understanding movement and time is vital to your success!

6 comments

  1. mich

    I do not know what to make sense of this article, so you must forgive me for my ignorance. In below A) refers to my answers

     The title states “How does TIME effect your trading?”

    A) I believe this should be “How does TIMING and chosen TIME FRAMES AFFECT your trading”. To affect something is to change or influence it, To effect something is a rather formal way of saying `to make it happen’. So I guess the author refers to “affect” as opposed to “effect”.

    The author says and I quote:

     “This is not just limited to the time you enter the trade, although that is certainly going to impact your trade because of typical pip movement during the time of day and economic events.

    A) I believe “time you enter the trade” means when you open a position. Yes indeed it affects why you go in. Imagine opening a position when London market opens and doing the same at 7:00PM GMT when nothing is happening.

     The author says “This is not just limited to the day either. Did you know that certain days have different average pip movement ranges?”

    A) Are we referring to certain days of the week like Fridays or we are talking about month end or when important announcements are made? If we are talking about something like SMA, then SMA is effectively shows a trendline and its sensitivity depends on the number of timeframes chosen for SMA but has little to do with certain days. There are clearly two distinct points in here; 1: The timeframe or rather the width of the histogram (5 min, 30 min 1 hour, a day etc) and 2: when you open a position or timing.

    The author goes on:

     All three effect the volatility and therefore the potential upside and downside of an entry. The time frame itself is one of the most important and often the most overlooked. Consider time frames like a slice of psychology. The bigger the time frame – the bigger the slice. The bigger the slice – the most chance for a wider pip range.

    This is not necessarily true as well. The larger timeframe will contain more volume of trades, however, that does not necessarily equates to wider pip range. Case in point a 15 minutes timeframe at 8:00AM London time on an instrument like GBP/USD will potentially have larger pip movements than a 2 hour timeframe between 7-9PM for the same instrument, same day. Conversely how many people open a position in an hourly timeframe for EUR/USD at 7:00PM London time?

    From a statistical point of view a larger time frame will contain more volume of trades and as such there will be more confidence in the position opened. However, if there is little volatility, then having larger timeframe will not help. In other words you will get an SMA which is effectively flat and the 15 min SMA is the same as 4 hours SMA.

    I would forgo the rest of the article as it is not clear to me what it is trying to convey. However, if I may add the following:

    Higher timeframes from the probability point of view have more data and hence the mean or averages on them are more reliable than the lower timeframes that typically contain less data and hence more suspect to statistical uncertainty. For example, a daily trading chart can be used to open a position in an hourly chart etc and that is the reason why the majority of trading techniques (SMA, Elliot Wave, Ichimoku etc) consist of an observation of higher timeframes and opening positions in a lower timeframe.

    Reply
  2. mich

    I do not know what to make sense of this article, so you must forgive me for my ignorance. In below A) refers to my answers

     The title states “How does TIME effect your trading?”

    A) I believe this should be “How does TIMING and chosen TIME FRAMES AFFECT your trading”. To affect something is to change or influence it, To effect something is a rather formal way of saying `to make it happen’. So I guess the author refers to “affect” as opposed to “effect”.

    The author says and I quote:

     “This is not just limited to the time you enter the trade, although that is certainly going to impact your trade because of typical pip movement during the time of day and economic events.

    A) I believe “time you enter the trade” means when you open a position. Yes indeed it affects why you go in. Imagine opening a position when London market opens and doing the same at 7:00PM GMT when nothing is happening.

     The author says “This is not just limited to the day either. Did you know that certain days have different average pip movement ranges?”

    A) Are we referring to certain days of the week like Fridays or we are talking about month end or when important announcements are made? If we are talking about something like SMA, then SMA is effectively shows a trendline and its sensitivity depends on the number of timeframes chosen for SMA but has little to do with certain days. There are clearly two distinct points in here; 1: The timeframe or rather the width of the histogram (5 min, 30 min 1 hour, a day etc) and 2: when you open a position or timing.

    The author goes on:

     All three effect the volatility and therefore the potential upside and downside of an entry. The time frame itself is one of the most important and often the most overlooked. Consider time frames like a slice of psychology. The bigger the time frame – the bigger the slice. The bigger the slice – the most chance for a wider pip range.

    This is not necessarily true as well. The larger timeframe will contain more volume of trades, however, that does not necessarily equates to wider pip range. Case in point a 15 minutes timeframe at 8:00AM London time on an instrument like GBP/USD will potentially have larger pip movements than a 2 hour timeframe between 7-9PM for the same instrument, same day. Conversely how many people open a position in an hourly timeframe for EUR/USD at 7:00PM London time?

    From a statistical point of view a larger time frame will contain more volume of trades and as such there will be more confidence in the position opened. However, if there is little volatility, then having larger timeframe will not help. In other words you will get an SMA which is effectively flat and the 15 min SMA is the same as 4 hours SMA.

    I would forgo the rest of the article as it is not clear to me what it is trying to convey. However, if I may add the following:

    Higher timeframes from the probability point of view have more data and hence the mean or averages on them are more reliable than the lower timeframes that typically contain less data and hence more suspect to statistical uncertainty. For example, a daily trading chart can be used to open a position in an hourly chart etc and that is the reason why the majority of trading techniques (SMA, Elliot Wave, Ichimoku etc) consist of an observation of higher timeframes and opening positions in a lower timeframe.

    Reply
  3. demosco

    This is a very brilliant article .my question is how long (approx) should one trade on each time frames to avoid overtrading.I Trade on the 1 hour time frame but what i observe yesterday ,friday was that after trading for few hours all my pip gains reduced and the price was just going back and forth .I also thought that may be the liquidity on that friday was not there and i should not have opened a position at all or may be i just overtraded .what do you think?

    Reply
  4. demosco

    This is a very brilliant article .my question is how long (approx) should one trade on each time frames to avoid overtrading.I Trade on the 1 hour time frame but what i observe yesterday ,friday was that after trading for few hours all my pip gains reduced and the price was just going back and forth .I also thought that may be the liquidity on that friday was not there and i should not have opened a position at all or may be i just overtraded .what do you think?

    Reply

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