Matching time frames to build a trading system

When establishing a trading method based on the two R’s of risk and return, it’s management of trading decision based on proven observations that will dictate the outcome of any trading system be it discretionary or algorithmic. Often the focus and reasoning behind trading are ‘how much can I make’? This internal thought process often goes one-step further and asks ‘how much can I make in a short amount of time’?

New traders are often blinded with the hindsight of seeing past data. They are convinced that the outcome going forward will be the same with the constant internal observation and confirmation of ‘what if I had taken that position and traded at that turning point, the profit would have been huge’!

This thought process is often the undoing of many new traders as they work at the right-hand edge of the chart with constant data flow appearing. Looking at some past data charts and imagining the outcome going forward, this can create an illusionary picture of future outcomes that keeps the trader in a potentially destructive trade outcome.

With the constant data flow in real time, the trader can be swept into the intra-period momentum trade, well before the trading period is finished. They are then left holding a less desirable position.

What does this mean?

Traders, in particular FX and futures traders, use intraday time frames of choice. For example, one-hour or 15-minute charts, as well as many of the variables available in this technology-driven endeavour. There’s nothing wrong with that, except trading decisions are often made during the formation of the price bar or candle, not at the roll over time between sessions. For example, a trader using one-hour charts should be making the trading decision at the rollover of the hour. This is because within the formation of this price data point, many interpretations can be made on the variations in the shape of the price bar or candle, which is on the way to being fully complete at the end of that time-frame period.

Entering positions before the time period rollover can be very challenging to the thought process. The trader often makes emotional decisions with correlations in the current moving price action and compare it to something in the past. This type of trading is subject to a variable and random outcome, which will lead to disillusionment with the process as a whole.