The Risks and Rewards of Trading Small Timeframes24th June 2018
I have recently been engaged in conversations with traders that have obtained good results over some timespan by trading sub-hourly timeframes. While it is possible to utilize micro timeframes for more accurate entries and stop placement, I have a b bias against intraday trading and focusing on the micro timeframes.
In trading, it is possible to utilize a risky trading strategy (for example a Martingale position sizing model, or short-term scalping on volatile instruments) and obtain good results for a certain amount of time. This is what happened to a former coaching student of mine (you can view his story and path to consistency here). But reality kicks in sooner or later and the true risk of these strategies is revealed. If you are still a firm believer in day trading or scalping, read on – it may save your account and trading career.
Short-Term Rewards, Long-Term Risks
Volatile instruments and short-term focus usually go hand-in-hand. After all, it’s not exciting to tackle AUDUSD (which has an ATR of about 60 pips) when you can tackle the Dax (which has a 200 tick range currently). The apparent simplicity with which profits can be made by scalping volatile movers like the Dax is a mirage, and it leads to overtrading because your mind is lured towards the profit potential and away from the process.
Now consider this definition of overtrading:
a near obsession in trading any/all news-based dislocations or momentum boosts during the normal course of business, typically through chart gazing (i.e. staring at charts long enough to “find an entry”). Traders will likely utilize news catalysts or favorite chart setups as “excuses” to justify action.
Unlike many jobs where “working more and working hard” might be desirable, trading is about working “smart” and making good decisions time and time again. In this context, more activity does not translate into higher profitability. Instead, it usually means more losses. Your goal is account growth over a medium to long time period. Consistency (sticking to your trading plan and ignoring anything that’s sub-par) and longevity (surviving year after year, compounding your account) are the key.
Are You Seeking Activity or Following a Plan?
To find out whether you are an overtrader, answer these questions:
- Do i find it difficult to not be in a trade? –> This is a clear sign of addiction, just like other people are addicted to gambling. Beware.
- Do i find that i’m unable to remove myself from my computer after entering a trade, or that it is very difficult to do so? –> This is a sign of uncertainty concerning your actions. It’s likely you either do not have a solid trading plan, or you don’t trust the one you are using, or you implicitly know it’s not robust. In the worst case, you are just “looking to snatch some ticks and bail” which has nothing to do with trading.
- Do I exceed my daily drawdown limit (do I even have one?) –-> if you’re trading more than once a day, you need to have drawdown limits in place to make sure that you are, in some fashion, thinking in terms of probabilities and with some kind of safety net.
- Can my account survive a likely losing streak? –> Short-term traders are all focused on win rates and frequently display negative-skew return profiles: lots of small winners and very few (but very large) losses that wipe out 5-8 winners at a time. If your trading hinges on your win rate, something needs to change.
- The minute my trade goes into profit, do I want to move my stop to breakeven? –-> This is a classic syndrome of people that trade thier equity instead of the market. The market doesn’t know or care where you got in. So you cannot evaluate a trade based on how far into profit you are.
- Can I look back and justify the trade I just took? –> This is a simple check, to make sure you are following a plan consistently.
- Am I long and short on the same day? –> If you find yourself flipping from long to short (or vice versa) during the same day, something is probably wrong with your filtering.
If you have answered yes to any of the above questions, you may want to remove yourself from live trading before it’s too late, read through/meditate on the following suggestions:
- Do not sit down looking for trades. Your brain is hardwired to find solutions so if you ask yourself “where’s a trade?” then you will find one…but it’ll be a loss more often than not. If you’re wondering about the impact that spreads can have on short-term trading, read this.
- Be ruthless with your trade selection. This also means that you need to possess a plan. You need to know what you’re looking for, where you’re looking for it and when you’re looking for it.
- Compartimentation: increase time doing stuff you like (gym, cooking, playing golf, etc.) and be mindfull about it. Do NOT think about trading when you’re away from the screen. You mind needs the break.
- Reward yourself once in a while, for being able to stand back and separate yourself from the markets. Good habits need encouragement. We don’t just need encouragement when we do something perfectly.
Ideas for Stacking the Odds
If you want to use the micro-timeframes with some purpose, at least try some of the following:
- Select your instrument based some form of relative strength
- Seek to identify the narrative guiding prices
- Look for longs only on instruments trending up, and shorts only on instruments trending down
- Use the microtimeframes to pinoint your entries within the broader picture, with tighter stop losses.
For example, here is a trade idea we issued this week on Nasdaq:
Nasdaq was the best index at the day of inception, in a clear uptrend:
Sentiment was favourable for longs, as the tensions between the US and China regarding tariffs had (temporarily) dissipated. After conducting the background check (and ONLY after this first crucial step), it becomes possible to deploy shorter term entry tactics to pinpoint good risk:reward opportunities.
This was a decent example, which was successful because of the background structure utilized and NOT because of the entry tactics or some particular technical setup on the micro-timeframes. Of course, even with the best structure, there will still be inevitable losses (which are the cost of doing business and cannot be avoided).
Over to You
Before you take these ideas and go searching for opportunities on the 1min charts, please be honest with yourself and make sure you are not just using this structure as a justification for your actions. Understand that short-term trading carries the highest risk of all strategies, and is possibly the least efficient strategy to adopt.
As retail traders we should all seek to miminize the time we dedicate to the markets, and maximize the efficiency of what we do. Short-term trading does just the opposite.
You’ve been warned!
About the Author
Justin is a Forex trader and Coach. He is co-owner of www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.
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