frame for making money which you have set as a goal, your personal time frame, and
the time frame of the market you have chosen to work with which I will call your
chosen time frame. These two time frames, your personal and your chosen time
frames, must be adequate or realistic standing alone, and together they must
dovetail. Let’s examine briefly what this means.
Adequate or realistic in this context means that there must be some meaningful
correlation, some sensible or reasonable connection between the goals you have set
and the way you go about achieving them on the one hand, and the known behavior
of the market you are trading on the other hand. What you want has to take into
account what you are dealing with. If you are bird watching in lion country and a lion
attacks you you can try to use your binoculars to defend yourself, but they are
probably going to be inadequate. Be realistic about what you are doing, what you are
dealing with, what the dangers are and how well you can ‘defend’ yourself against
them.
Practically this means that prepared traders have considered a number of factors that
unprepared traders haven’t, such as a mature, realistic assessment of their current
situation, i.e. are they working full-time or part-time, are they just experimenting a bit
with trading or is it a serious occupation. How does trading in a 24 hour market fit in
with their existing daily rhythm? This market has specific important junctions, road
signs if you like, at weird and wonderful times. It may be 9 o’clock in the morning for
the professional traders in London or New York moving the market, but what time is it
for you? Midnight? Time to spend with the kids? Time to get on the tube? Time to
catch a plane, have a meeting, write an exam? These aspects will have a huge
impact on your overall performance.
Personal time frame
Your personal time frame is the time you have given yourself to make money in, for
example, a month, a quarter or a calendar year. This period must in itself be
reasonable. Because of the volatility of the market there will be times when you are
out of the money on some or all of your positions. What happens if you have two
losing months in a row? Are you a bad trader, have you been unsuccessful? Yes, if a
month is your personal time frame. Maybe you feel like a failure, but is one two or
even three months all that important in terms of a lifelong investment in currency
trading? Or is this just something you are going to give a try, and abandon at the first
sign of trouble? If, however, your time frame is a year, or longer (you are viewing
your trading as a business and a long term venture) then two losing months is simply
a bad start to the year. The answer to whether or not you have been successful
depends on how realistic your personal time frame is.
Considering your goals, especially the criteria you are going to use to measure if you
are on track, is a vital aspect of your business plan. This will fundamentally affect
every aspect of your trading and the choices you are going to make, and sometimes
will have to make, regarding your trading business. Define what you consider
success in your new venture, and please, give yourself a chance by being realistic.
Try to take into account that this market will go against you, you will have out-of-the-
money periods, there will be periods where inactivity is your ally and this can be
frustrating to the novice.
Chosen time frame
Your chosen time frame of the market is, simply put, a choice about what sort of price
movement you consider significant over a given period. This time frame can’t be too
long or too short. If it is too long you are not going to allow yourself time to enter the
market and benefit from its daily volatility. If it is too short you are merely playing with
randomness. The shorter your time frame the greater the randomness of price
movements.
Most day traders err by picking time frames that are too short. If you are
watching a five minute or ten minute graph, you are merely watching prices randomly
tick up and down. Yet there are traders, not many, who make money doing this. But
what they are in fact doing is not basing their entire trading strategy on five minute
graphs. Instead they have a good grasp of the bigger picture and are using these
short time frame graphs to time their entries. In this they are misguided and I can
prove it to them. Five minute or ten minute or fifteen minute graphs tell you nothing
except how random randomness is. These traders should do a back test looking at
what the market did immediately after they entered it. Go test it yourself on a demo
account if you don’t believe me. Half the time the market will move up and half the
time it will move down. You are witnessing flurries of movement scurrying up and
down with no discernible trend or pattern. Random movement. So why bother? I say,
pick a level, it can be anything from 20 to 40 pips and get in, trusting that your level,
and not the next move, is what is important. You’ll sweat less too. Give randomness
its due.
That is why I can say that some time frames are wrong (read “not optimal”), and I can
say this with a great amount of certainty. Add to this the fact that you are probably
watching the prices fed to you by one market maker, your market maker, while at the
same time there are literally hundreds of other market makers all quoting their own
prices. Since the market is reasonably efficient these prices won’t differ too much but
that of course is a function of your time frame. The smaller your time frame the
greater this distortion. Two or three pips difference in a day which averages a 100
pips movement is far less significant than two or three pips in a ten minute period
averaging only, say, a seven pip move. On a risk management level this also
amplifies the risk exponentially. It is simply not true that you can apply universal risk
management principals of risk reward, stop loss and other parameters on all time
frames. Informed readers should make a note here that I differ from conventional
wisdom on this point. I don’t only differ on a basic, mathematical, statistical and
probability theory level from this but also on a behavioral psychological level and a
common sense (the most important) level. A trader can lack a lot of things, patience,
discipline, but a bit of common sense goes a long way.
Relate personal and chosen time frames
Your personal and chosen time frames must not only be sound in themselves but in
sync with each other. For example, you can’t have a personal time frame of banking
a profit a day while your chosen time frame is a weekly graph. These issues will
become clearer when we start to look at practical trading strategies. For now I want
you just to take note of the role which perspective and time frame plays in currency
trading.
If I make the statement that having a view on the market (which way it will go) on any
given day is fooling yourself - you are largely at the mercy of randomness - how is it
possible, you may legitimately ask, to have a daily online briefing with my students
and clients in which we look at the market, form opinions and take trading decisions?
It has to do with the underlying longer-term view I have. This opinion, though formed
daily, is made up of a composite of factors and some of these factors are longer term
in order to reduce the role randomness plays. If I had to call currencies on a discrete
daily basis, that is, for that day only without recourse to the price relative to recent
highs and lows, upcoming or past events, in other words all the relevant and
available information I normally use, I would flip a coin.
Randomness and time frames
Think about it like this. A coin, like a five minute graph, has no memory. Just because
it has come up heads eight times in a row, it doesn’t start to ‘adjust’ itself in order to
provide the required probability balance of a 50/50 ratio over a given number of flips.
Five minute charts are the same. They are like coin flipping. To call whether the next
5 minute period will end up or down is exactly like flipping a coin. Go try it. Prove it to
yourself. These 5 minute periods have no memory. So why watch them for signals?
People do, but very few make money from it. Those that do, as I have pointed out
above, are doing something else besides. They are doing the right things using the
wrong methods. They probably have a good grasp of the fundamentals and the
bigger picture, trade with discipline, have a sound money management strategy, and
so on. This, not watching randomness, is making them money. They may have taken
a five minute graph and zoomed it out so that they are looking at a day’s action.
That’s fine. But that is something different.
No matter what your time frame, entering the market and being in-the-money five
minutes later is luck. That is all. It is nice, sure, but needing that fix is dangerous. It
can’t be repeated with any certainty. Short time frames give you no information that
can turn a random series of price events into a series with higher predictive certainty,
a probability that this and not that will occour. If you are winning then you are on a
lucky streak. It will end. If you are consistently making money you are probably,
inadvertently trading in the direction of the long-term underlying trend. This is unlikely
though, since people who use short time frames generally don’t keep their positions
open for long enough to benefit from the long term trend (assuming that they are
trading in that direction).
