The purpose of this week’s article is actually two-fold: to mildly encourage you to trade forex on longer time frames, and to help relieve some of the potential stresses that come with trading.
First and foremost, whenever I talk to a new forex trader the question of what style of trader they are comes up. By style of trader, I’m referring to short term day traders, swing traders or even a long term position traders. By a large majority, their answer is usually day trader or short term swing trader (holding for a day or two.) When the “day trader” answer comes up, of course I need to ask how often they are trading during a typical trading day. The answers have ranged from only one trade a day to as many as 40! Perhaps I am getting too conservative in my old age, but 40 trades a day seems like a lot of work. In fact, it sometimes ends up being a source of entertainment/excitement for traders!
Here’s the interesting thing about trading using our core strategy of buying in quality demand zones and selling in quality supply zones, the strategy applies to every time frame and trading style. Someone trading from a 15 minute chart is looking for the same type of zones that someone who is trading from a 240 minute chart is looking for. In the following EURUSD pair of charts, the chart on the left shows two demand zones with corresponding blue arrows indicating potential long entries. The pink arrows show possible exits using previous supply zones. Looking at the time and date at the bottom of the charts, how long was the 240 minute chartist in their trades? A couple of days perhaps? And what about the 15 minute chartist? A couple of hours? What do you think the difference in actual time looking at the charts/computer screen is for these two trading styles? The answer is a lot. The 240 minute chartist might only check her charts a couple times a day, while the 15 minute chartist would be there every couple of hours.
Now, many traders will say that trading in smaller time frames offers you more opportunities, which I would agree with. However, you will probably also spend much more time looking for trades and managing your trades on these smaller time frames. Another interesting thing about short term traders is the fact that they rarely hold their trades overnight. This confuses me in this awesome 24 hour a day forex market! Because you may miss out on an extended multi day, hundreds of pip move by exiting your trades too early. I encourage new traders to trade from larger time frames; it seems easier to “let your winners run” on larger time frames.
The second part of this week’s newsletter is aimed at trying to minimize some of the stresses that can come with highly active trading. Very often new traders find trading to be very exciting, thrilling, often even choosing to trade for the “rush!” It makes me cringe when a new traders says they trade for the excitement! In fact I’m not even thrilled when someone says they trade “for the money.” My personal belief is that we trade to make money for the things that the money can do for us. In previous newsletters I’ve mentioned the “why” of your trading. This could be for the freedom of not working for someone else, or to have the ability to trade from anywhere, etc. etc. When someone’s why is “for the excitement,” I know they are probably trading too aggressively for their skill level or account size. At Online Trading Academy, we encourage people to risk only a small portion of their account on any trade, anywhere from 0.5 to 2% risk. When someone says they are risking ten or 20 percent of their account on any particular trade, I know their days as a trader are numbered. It will be very “exciting” to fill out your resume after you blow up your account when trading this aggressively!
Free Trading WorkshopI want trading to be boring and predictable. I “expect” to make money on every trade, but certainly don’t throw a tantrum when I don’t! By risking small percentages, when the inevitable losses do show up I’m not devastated and neither will you be. When the winners show up, and you know how to manage them properly, I am certainly pleased but not to the point of running up and down the street waving my hands in the air! Part of this casual attitude to the market is certainly developed over time; many of our instructors have been trading for decades! When new traders put too much emphasis on this trade, on this moment in their trading journey, I know the extra stress will probably cause foolish decisions. When you consider the possibility that you may be a trader for 50 years and make 25,000 trades, you probably won’t get too excited about this one trade today!
So there you have it. Trading from larger time frames can be a bit boring but because of the ability to hold overnight winning trades, but I encourage it. Also, trading to your skill level and account size might seem boring, but will also allow you to trade for an extended period by taking some of the emotional highs and lows out.
Written by Rick Wright Online Trading Academy Instructor
Rick Wright’s goal as an Online Trading Academy Instructor is to accelerate the student’s learning curve, whether they are interested in High Frequency Trading or Investing for Beginners. He teaches classes on Online Stock Trading, Forex Trading and Futures, among others.
Rick studied economics and psychology at Iowa State University, and entered into the brokerage business in 1992. He earned the NASD Series 4,7,9,10,24,55,63, and 65 licenses. He helped grow an online brokerage business which was eventually sold off. Rick has also held positions as broker, branch manager, and several VP positions in the brokerage business.
Rick began trading equities in 1997, and was introduced to the Forex market in 2002. Currently trading from home in Dallas, Rick is also a frequent contributor to various TV and business talk radio shows.