Which Time Frame Is Best In Trading? [Day trading, Swing Trading & Trend Trading]

Last Updated on June 19, 2022 by Quantified Trading

Which time frame is best in trading? We believe the best time frame in trading is daily bars. Every time frame has its pros and cons, but we recommend being agnostic and open for any time frame. You simply have to pick the best time frame that best suits your needs and where you can get an edge. After all, one dollar made by using daily bars has the same value as gains in any other time frame.

Many traders are wondering what time frame they should focus on when they started trading: Minutes, hours, days, weeks, months, or even years?

We believe the best approach is to be agnostic when choosing the time frame in trading.  As a matter of fact, we regard time frame as one of the best diversification tools there is, and you should thus trade as many different time frames as possible.

What is a time frame in trading?

We need to start with a definition of what a time frame is.

The time frame is your time horizon on your trade, for example how long the trade is gonna last, and what kind of bars you are using in your strategy. You can use tick data, 5-minute bars, daily bars, weekly bars, quarterly bars, or even yearly bars. One bar compresses the into four different readings for each bar: the open, the high, the low, and the close.

Let’s start with the time horizon first:

The time horizon

When you are making trading strategies, most traders have a specific time horizon on their mind:

Are you trading an overnight edge from the close to the next open? Or are you day trading and not keeping positions overnight? Or are you a swing trader and plan to keep positions just for a few days? Or you are a “buy and hold” investor that keeps positions for years?

There are many ways to make money in the markets, and by deciding the time frame and time horizon you can make many twists and strategies.

Of course, most exit strategies are dynamic and flexible and thus you don’t know the length of a trade when you enter. But you most likely have a ballpark number of minutes, days, weeks, etc. You have a general idea of circa days you’ll be in a trade.

The time frame on bars

When you are making a strategy you need to quantify the rules, or at least that’s what we recommend.

The rules can be based on bars from a wide range of time frames: ticks, minutes, hours, days, weeks, and months (and so on). You can even mix them and generate signals on for example both daily and weekly bars in one strategy. The weekly bars can determine the long-term trend, for example, while the daily bars pinpoint the entry signal.

Even if you are a day trader you can use weekly bars as input for your trades. For example, you can only generate long signals on daily bars if the last weekly bar was higher than the previous bar. In our own trading, we use a few day trading strategies where we include daily bars as part of the strategy. Only your imagination sets a limit on what you can backtest! As a matter of fact, we recommend most traders to use daily bars if they want to develop day trading systems.

When you start out, we recommend using daily bars. One reason for that is simplicity in backtesting, but also you can still find some inefficiencies in that time frame.

What time frame do investors use?

We define investors as long-term speculators or investors and these most likely don’t consider charts or quantitative analysis. They use fundamental analysis instead.

However, investors always have a time frame in the back of their minds, but they are depending on the time in the market for their stocks to generate good returns. We are talking about years, even decades.

Day traders are also investors, but we like to refer to them as traders:

What time frames do traders use?

Traders normally use a pretty short time horizon. Their goal is to turn around their capital frequently and generate many small gains that accumulate over time and at the same time don’t have any significant drawdowns.

For example, some are day traders and, of course, very rarely use longer time frames such as weeks or months. Day traders might use such long time frames, but most likely only as a tool or parameter to generate trades in a shorter time frame.

Other traders trade for example overnight edges and strategies:

Trend followers, on the other hand, might use days, weeks, and months.

What is the best time frame to swing trade?

Is it possible to find inefficiencies in the markets? Yes, but you have to find the sweet spot of generating many signals and at the same time having and finding an edge. Inefficiencies are hard to spot and find, and most of them are short-term, thus daily bars should be a good starting point.

We believe the most convenient time frame for swing trading to start with is daily bars. If you use intraday bars, used in day trading, you risk getting drowned in randomness and noise. Day trading requires discipline and knowledge.

Why you should trade many time frames

We do day trading, swing trading, and investing. The time frame spans from some hours to decades.

We do this because we want to spread our investments into many time frames to get the most efficient use of our capital. Furthermore, we do it to spread out risk and decrease correlations.

If your long-term investments have a bad year, as you invariably will experience sooner or later, your paper losses might be offset by day trading and swing trading that might perform completely differently.

This chart explains what we mean:

Brummer & Partner’s return. Source: Website.

The red line is the performance of a multi-strategy hedge fund, and the grey line is the Swedish Total Return Index (SIX). We want a smooth equity line.

Diversification is important because most investors and traders don’t have the stomach to sit through severe drawdowns of 30% or more. Many can’t stand the pain and give up or sell their positions – at what later turns out to be good entry points. Trading and investing are just as much about avoiding behavioral mistakes!

We have done our fair share of mistakes and we believe most traders and investors have.

Conclusion: Which Time Frame Is Best In Trading?

Which time frame is best in trading? We have argued that daily bars are the best time frame in trading. You have to find the sweet spot between generating enough signals and at the same time reducing drawdowns. Even though daily bars might be the best time frame in trading, you should look for expanding into both different time frames and asset classes to increase diversification.

Different time frames are a useful tool to diversify risk that you can use to your advantage.

Drawdowns and losses are inevitable no matter your time frame, but fortunately, you can potentially minimize drawdowns by using different time frames in your trading. If you face losses in your long-term positions or your weekly trend-following, you might be “saved” by some gains in your day trading signals that offset losses at other time frames.

 

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