How to Select A Best Chart Time-Frame for Your Trading Style

[suriNotes 11]

How to Select A Best Chart Time-Frame for your Trading Style

By Suri Duddella, September 09, 2008

Please send your comments and suggestions via pm.

 

Introduction

 

Many day-traders use 5 minute, 15 minute, 233 Tick, 610 Tick, 1500 volume etc. chart time-frames for short-term trading. Few traders know why they use the time-frames they use for their trading but many traders have reasons like 'It fits my trading style', 'John X uses this time-frame', 'I like how it looks' or 'It is a Fibonacci Number' etc.

 

Trading harmonically with your style and personality may greatly improve your trading results. If you plan to scalp the markets, trading 60 minute ES chart may not give you enough trading frequency to be able to successfully scalp 1-3 point moves. If you are a swing trader and trying to focus on 89 tick chart you may be impacted by market noise and presented with too many false signals. Ideally you want to select a time frame which fits your trading style to filter out market noise yet provide enough market resolution to make enough quality trades to meet you daily goal. So, how do you determine this time-frame?

 

Knowing how long a trade requires (average time) between entry and exit will help avoid exiting a trade too early. Allowing trades enough time to meet their profit objectives will often improve win-rates and reduce over-trading. The use of smaller time frames tends to have more bars and therefore requires greater number of entry and exit decisions. More decisions often lead to more anxiety and mistakes. Hence, using a proper chart time-frame will help you make fewer yet more successful trading decisions thereby improving your trading confidence.

 

In my view, traders should focus and trade a single chart time-frame which fits their trading style. It can be TICK, VOLUME or TIME-bars. They could focus on multiple time-frames for analysis if they wish, but they should focus and use a single time-frame to trade and should NEVER switch to another time-frame in the middle of the trade.

 

Here is an analytical approach to help traders define a proper time-frame for themselves. It may not be a perfect method but it will give traders insight into what activity levels (eg: Win-Rate, Number of Traders, Trade-Size) needed to meet their trading goals. This method is best used iteratively in a what-if fashion to help create a new or validate an existing trading plan. Traders who intend to scalp for a smaller profit even with a high win-rate will be surprised to learn how many trades are required to make a respectable daily goal.

 

Approach

 

Traders should ask some inward-bound questions like 'What is my goal?'

Am I a 'Scalper/Day-Trader', 'Swing-Trader' or 'Investor'? What instruments should I trade? Eminis? (ES, YM, NQ, ER2...) or Stocks or FX?. What is my trade-frequency and manageable risk/reward to achieve my profit objectives?

 

I am going to present a daytrader's scenario trading Eminis (ES, YM, NQ) with

short-term profit objectives (1-3 pts) to derive a best TICK chart time-frame to trade.

First, I will present three different modules to collect chart data and what-if analysis data. In the end, all this data will be combined and presented some conclusions.

 

Please note these are What-if scenario's/tools that you can work and improve to maximize your goals. You can also derive the same for Time or Volume charts.

 

 

1.Bar Internals

 

Build a Spreadsheet or RadarScreen layout to determine BarInternals. Then compute for each market instrument (@ES.D, @NQ.D) and for each time-frame (55 tick, 233 tick, 610 tick, 987 tick) the Bar Internals. Only use Regular Trading Hours for these calculations.

 

The Bar Internals include:

 

Avg. Number of Bars in a Reg. Trading session (3-days of data)

Avg. Time for Each Bar

Avg. Range for Each Bar

 

When computing Avg. Time/Range of each bar, you may want to consider

removing the lunch hours.(11.30 am-1.30 pm EST).

 

 

Looking at the average number of bars column in above graphic, 55 tick @ES.D chart produces over 2500+ bars in a single day (RTH). Each 55 tick bar takes about 10 seconds to complete. If you were to make a trade decision at the end of each bar, you will have to make 2500+ decisions (at 10 seconds interval) in the entire trading day. That is a daunting task and humanly impossible to make even 5% correct decisions consistently. So, if any one claiming to trade 55-tick @ES chart, run-away from them. A 610 tick relatively produces lesser number of bars (232) resulting in lesser number of trade decisions.

 

2. A Trade Planner (What-if Calculator)

 

A What-if tool is built to compute how many trades a trader may need to make in a single-day to achieve his daily goal (in Dollars, ex: $1000/a day) using any market instrument (Ex: ES) of traders choice with a win/loss ratio (60, 70, 80%...) and a contract size (2, 5, 10…). It will build a trading-plan based on trader’s daily goal, market instrument, number of contracts and average win-ratio.

 

For example:

A $1000 a 'Daily goal’ trading @ES

Number of Contracts: 2

Commission per Contract: $6

Win/Loss Number: 70 (for 7/10 winning trades)

Target: 3 pts

Stop: 2 pts

 

This What-if calculator results in a trade-plan outlining 'Make X Number of Trades, using N-Number of Contracts' to achieve your $ GOAL. It will show the details of Wins, Losses and commissions etc. Experiment with your own data and compile this information.

 

TradePlanner:

http://www.surinotes.com/etc/tradePlanner.cfm

 

 

Trade Plan

 

 

The above graphic details a Trade plan to trade 3 ‘ES’ contracts per trade and set 3 pt profit targets and 2 pt stop loss setup. With a win-ratio of 70% a trader needs to make at least 10 trades to achieve $2000 profit target. It also shows the Gross Profit (after commissions) and Loss details.

 

3. Build a Simple Proxy Strategy

 

The purpose of this proxy strategy is to compute how many trades exist in each chart-time frame during a single trading session to reach traders goal using 'Target' and 'Stop loss' (in points).

 

Note: Do not make this a complex strategy. Write as simple as possible.

 

The idea behind this strategy is once we know approximately how many possible Travel Range (Target+Stoploss) trades exist in each time-frame, we can see if a trading methodology fits into that chart-framework (time-frame, range, time etc.).

 

Write a simple strategy to BUY next bar's OPEN (if you have no market position) and place your 'Target' and 'Stop Loss'.

 

Example:

if (marketposition = 0) then // Not in the Market

BUY next bar OPEN;

 

SetStopLoss(StopLoss);

SetProfitTarget(Target);

 

Run this strategy on each-time frame of chart and compute how many trades exist in a single session and percentage of profitable trades.

 

 

The above strategy produces above Data.

In each time-frame the strategy is resulted in

Number of Trades,

%of Profitable Trades

Number of Profit Trades

ProfitTrades Per Day

Avg. Number of Bars for Each Trade

 

For example, on @ES.D 610Tick chart, had 197 trades in 3-day time-period

with 43.15% profitable. Average Number of trades per day is 28.34 trades and

Average Number of Bars to complete the trade is 5.

 

Results/Conclusions

 

A combined view of Time/Tick chart relationship is presented from the above data of Bar Internals and Proxy Strategy data. From the Trade Planner, if you have a daily goal of $2000 trading @ES 2 contracts, you may need to trade 10 trades with 3 pt profit target with 2 point stop loss. That means, your trade is travel range is about 5 points. So, given the combined data, a 987 tick may not work since its travel range is less than 5 points for a winning trade. The next chart-time frame is 610 tick that has 6.2 pts travel range. This 610 tick chart may work as it produces the trade in 3.5 to 6 bars (4-6 decisions) with a win travel range of 4.34 to 6.2 pts. The average time for each trade is between 280 seconds to 401 seconds. Comparing the same with 233 tick, it has a higher travel range of 6.1 pts to 8.7 pts range. It also requires 7.7 to 11 bars for each trade an average.

 

 

As you can see from the above exhibit, given the goal to maximize the profitability and reduce the number of decisions i.e., bars, trading 610 tick time-frame makes more sense. This chart time-frame produces enough travel range, has more than 10 trades to reach the daily goal ($2000) with given a win-ratio (70%) and Target/Stop ranges. Also, it suggests a trader should wait at least 280 seconds to allow each trade to reach profit/loss range.

 

Of course, you may want to conduct this analysis using a proxy trading strategy for your trading style. This may not be perfect model as Bar Internals and market dynamics change regularly, but it provides a frame-work, analytical approach and reality-check to select a best chart time to trade.

[brownsfan019 17]

Wow...

 

This is really good stuff Suri and I hope we see more from you!!!!

 

Welcome to the forum!

[MidKnight 12]

Hi Suri,

 

Very comprehensive post, thank you!

 

My best regards,

MK

[whisper01Barry 10]

Thank you very much, always enjoy your work.:applaud:

Barry

[steve46 12]

Well, first I want to point out the obvious, that traders do not make trade decisions at the "end of each bar" therefore using that metric provides a misleading context for evaluating a chart.

 

Second, moving from one context to another (from one time frame to another) is in fact very helpful to traders who have problems holding a position. I am glad to show examples in my own thread.

 

In order to make sense of your proposal Suri, one has to substitute a tradeable system and see how many "tradeable" opportunities they find in each. Once that is done, they then have to evaluate the liklihood that they will take those signals. While I agree in principle with your criticism of how traders decide to adopt a specific type of chart, I do think that one has to acknowledge that some chart types are simply easier to read. There is a psychological aspect to this that I can elaborate on, and perhaps move the discussion forward (if you don't mind)...

 

I will stop here, as you indicate that you want reponses by pm, but frankly that doesn't help readers to evaluate their options. I will talk more about those options in my own thread (unless you decide to permit further comment here).

 

Thanks

Steve

[Kiwi 16]

steve,

 

I think that a public exposition would be more helpful. Suri, I'm sure that when its not a matter of clarification you would agree.

 

I will share a little of my trading style and explain one reason why I think a second timeframe can be useful. First, I find your general idea to be good and my decision making timeframe fits your criteria. My own criteria had as much to do with the meaningfulness of bar breaks as wanting xx swings per day and that requires experimenting around your likely timeframe to decide when the other participants in the market see a move as likely to be important.

 

But. On the two timeframes (and I actually use 3 with a 3rd one being much longer term so I can just check out long term support and resistance when the market starts to run). I observed that sometimes a bar break leads to a direct progression away from the break but at other times it is likely that there will be "noise" before progression. The likelihood of one vs the other can be determined at a lower timeframe and then you can choose to "jump now" or "take advantage of the noise."

 

I won't explain in detail but will show two charts (which naturally perfectly illustrate my point) The background bars are my decision making timeframe and the ohlc bars you see on the charts are my fine tuning timeframe.

 

.

[jperl 11]

There actually is a much simpler analytic approach in determining what time frame you should use for trading. The idea is based on the premise that most traders are actually trading market noise: the volatility of the market as it oscillates up and down during the day. The time frame to chose then is one in which the range of each bar is much less than the market volatility. Once you know the market volatility, it's a simple matter to choose a time frame.

 

So quantitatively, what's the market volatility? The market volatility is one standard deviation of the price data with respect to the average price. So for example if the standard deviation is 20 ticks, choose a time frame in which the range of each bar is much less than 20 ticks.

 

If you are using a time frame for which the range of the bars is more than 20 ticks then you are using too long a time frame.

[sevensa 10]

The market volatility is one standard deviation of the price data with respect to the average price.

 

How do you calculate the average price? If you use x minute bars to calculate this average, wouldn't this mean that you always will need to use a time frame less than x to trade?

 

Or do you use x number of ticks to calculate this average? If so, what number of ticks do you use? Wouldn't the result be drastically different depending on the number of ticks you use?

 

Also, wouldn't you want to use an interval with range larger, instead of smaller than the volatility/noise to filter out the noise?

[Sharp2Be 10]

There actually is a much simpler analytic approach in determining what time frame you should use for trading. The idea is based on the premise that most traders are actually trading market noise: the volatility of the market as it oscillates up and down during the day. The time frame to chose then is one in which the range of each bar is much less than the market volatility. Once you know the market volatility, it's a simple matter to choose a time frame.

 

So quantitatively, what's the market volatility? The market volatility is one standard deviation of the price data with respect to the average price. So for example if the standard deviation is 20 ticks, choose a time frame in which the range of each bar is much less than 20 ticks.

 

If you are using a time frame for which the range of the bars is more than 20 ticks then you are using too long a time frame.

 

Jerry, sounds like a good approach. Question: Which timeframe would you then use to calculate the stddev? Thanks.

[JBWTrader 10]

Hi Suri

That is a very helful tool for traders. Thank you for posting that.

Your comments on Tick chart size vs decision making is very relevant.

 

What you have diplayed is a tool that can certainly help people form a more robust approach to the markets and it really asks the Question for people. How well does one know their strategy/Tactics/Systems.

 

Of course there will always be debate about wether stop losses or targets should be rigid etc however at the end of the day these tools forces one to think further on many aspects of trading including ones style and rules..

 

You have been around a number of years and have a lot of people who respect your knowledge. I am one also who does...

 

Thanks again

All the Best

John

[jperl 11]

How do you calculate the average price? If you use x minute bars to calculate this average, wouldn't this mean that you always will need to use a time frame less than x to trade?

The average I am referring to is that of all trade data over the time frame which you are looking at. So, for example, if you are a day trader and your chart data starts at 9;30 this morning, you would average all the data from 9:30 till the present. For a complete discussion of averages, standard deviations, see the [thread=1962]Trading with Market Statistics[/thread] Threads

 

 

Wouldn't the result be drastically different depending on the number of ticks you use?

 

and

Jerry, sounds like a good approach. Question: Which timeframe would you then use to calculate the stddev? Thanks.

 

No if you start every average computation at the same starting time. Yes if you start the computation at different starting times. For example, if you compute the average of the trade data starting at 9:30, it will look the same on every chart you use, 1 min, 2 min 3min etc. That's the beauty of this type of statistic. It's time frame independent. If however you start the computation including yesterdays data along with today's, then the average will have a different value.

 

... wouldn't you want to use an interval with range larger, instead of smaller than the volatility/noise to filter out the noise?

No. If you filter out the noise you essentially filter out any trade. Noise is where the action is. In the words of Nihabaashi "To fear volatility is to fear profits". Again a complete discussion of this is in the Trading with Market Statistics threads.

Edited September 13, 2008 by jperl

[sevensa 10]

The average I am referring to is that of all trade data over the time frame which you are looking at. So, for example, if you are a day trader and your chart data starts at 9;30 this morning, you would average all the data from 9:30 till the present. For a complete discussion of averages, standard deviations, see the [thread=1962]Trading with Market Statistics[/thread] Threads

 

 

Sorry, but I still have a difficult time to understand how you will use this to decide the timeframe to trade on? Do you use the Standard Deviation from yesterday to decide what time frame to trade on today? But then the standard deviation at the end of the day will be drastically different than what it was after the first 30 minutes if you continue to include all the data from the beginning. Or do you run it from 9:30 and check it every hour to see what the current calculations are and change your timeframe after each check?

 

No. If you filter out the noise you essentially filter out any trade. Noise is where the action is. In the words of Nihabaashi "To fear volatility is to fear profits". Again a complete discussion of this is in the Trading with Market Statistics threads.

 

I don't think noise and volatility are the same thing. You want to filter out noise and trade volatility. This will be accomplished by trading a higher range than the results of the calculations, which in essence will filter out the noise and allow you to trade the volatile moves which rise above the noise. There is no rhyme or reason to noise. Why would someone want to tade that?

[jperl 11]

Sorry, but I still have a difficult time to understand how you will use this to decide the timeframe to trade on? Do you use the Standard Deviation from yesterday to decide what time frame to trade on today? But then the standard deviation at the end of the day will be drastically different than what it was after the first 30 minutes if you continue to include all the data from the beginning. Or do you run it from 9:30 and check it every hour to see what the current calculations are and change your timeframe after each check?

What I personally do, is look at the the SD from the end of yesterday and see if there is a position trade that I could enter for today. If there isn't then I will start a computation of the data just for today and wait until the SD gets large enough compared to the bar range before initiating a trade for today. Again this has all been discussed in the Trading with Market Statistics Threads

 

 

 

I don't think noise and volatility are the same thing. You want to filter out noise and trade volatility.

 

I gave you a quantitative definition of volatility. It is a measure of the deviation of the data from the mean. If I enter a trade at the mean, I expect the market to move 1 standard deviation. How it gets there is not of any concern. It could move there smoothly or jiggle its way there. If you wash out all the jiggles(which are just standard deviations of the data on a shorter time scale which I presume is what you mean by noise) then you miss the opportunity to define a good entry and a good exit point.

[sevensa 10]

Thanks. I think I have a vague idea of what you are saying, but it sounds more like a trading methodology than a way to pick a time frame to trade on. In fact, it sounds like the time frame is irrelevant.

 

With all due respect and I am not trying to sound sarcastic, or launch some kind of attack as this is not my intend at all, but when you said in your initial post "There actually is a much simpler analytic approach in determining what time frame you should use for trading.", I didn't expect someone will need to read 12 threads with 1000's of post to understand this simpler way of determining the time frame. After all, Suri outlined his approach in one post.

 

In the end, I think this is just another case of "for each their own". I appreciate your insights and input on determining the trading time frame and thank you for it, but I think I will pass.

[jperl 11]

Thanks. I think I have a vague idea of what you are saying, but it sounds more like a trading methodology than a way to pick a time frame to trade on. In fact, it sounds like the time frame is irrelevant.

 

Sorry for the delay in getting back to this.

What I sense here, is a need for a better understanding of market probabilities and how that helps your trading style. The market statistics threads will help you in this regard, which is why I wrote them. They are NOT a methodology(although I do present some methods along with them). It isn't necessary for you to read all the threads. In fact if you just read the first few and look at the videos you will have a good working knowledge of market statistics.

I think once you have a feel for the concept of standard deviation, you will understand my statements above about why you should not trade bars whose range is larger than 1 standard deviation

[BlowFish 10]

Thanks. I think I have a vague idea of what you are saying, but it sounds more like a trading methodology than a way to pick a time frame to trade on. In fact, it sounds like the time frame is irrelevant.

 

With all due respect and I am not trying to sound sarcastic, or launch some kind of attack as this is not my intend at all, but when you said in your initial post "There actually is a much simpler analytic approach in determining what time frame you should use for trading.", I didn't expect someone will need to read 12 threads with 1000's of post to understand this simpler way of determining the time frame. After all, Suri outlined his approach in one post.

 

In the end, I think this is just another case of "for each their own". I appreciate your insights and input on determining the trading time frame and thank you for it, but I think I will pass.

 

 

You can read the first post in each thread and get the concept. The rest of the posts are discussions questions and all the other stuff that you get on forums. The first posts are clear concise and structured very well. It is not often you get a really unique perspective on trading but this is. Regardless of your chosen trading style this is an important piece of work (imo).

 

It is simple but requires some knowledge. Having said that choosing a time frame is simple if you have experience. It is important as its one of the few variables you have complete control over. Personally I just tweak things until it shows what I need to see to capture the swings I am interested in. Of course you need to know what you need to see.

[zhuguoqing 10]

Thanks.

 

zhuguoqing

china,tianjin