Last Updated on July 21, 2021 by Oddmund Groette
Many traders are wondering what time frame they should focus on when they started trading: Minutes, hours, days, weeks, months, or even years?
There is no best or worst time frame in trading. Every time frame has its pros and cons as you’ll learn in this article. You simply have to pick the best time frame that best suits your needs and where you can get an edge.
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 the 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.
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, if you have a flexible exit and thus you don’t know when you exit, but 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.
Even if you are a daytrader 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.
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?
We believe the most convenient time frame for swing trading to start with is daily bars.
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, but most of them are short-term, thus daily bars should be a good starting point.
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.
- Why build a portfolio of quantified strategies
- What does correlation mean in trading? (Trading and correlations)
This chart explains what we mean:
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: why different time frames are a good trading tool
Drawdowns and losses are inevitable no matter your time frame, but fortunately, you can potentially minimize drawdowns by using different time frames. 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.
Different time frames are a useful tool to diversify risk that you can use to your advantage.
If you want ideas for trading strategies we give you a humble reminder that this website provides both free trading strategies and paid subscriptions in any time frame:
Disclosure: We are not financial advisors. Please do your own due diligence and investment research or consult a financial professional. All articles are our opinions – they are not suggestions to buy or sell any securities.