A wise and seasoned trader once told me that he liked the largest chart he could fit on his computer screen when he was a newer trader. As he gained in experience, however, he realized charts of modest size were best. Perplexed, I asked him, “Why?” He quipped, “Because the movement doesn’t seem as risky!”
Although humorous, it begs the question, “Does size really matter?”
Further inquiry with this old salt of a trader led me to understand that it wasn’t so much the size on the screen, but the time frame that matters. Let’s see why.
The Newer Trader’s Time Frame Error
Newer traders often chose very small time frames. In the S&P e-minis, for example, a one-minute or even a small-scale tick chart is often preferred. There seems to be good logic behind this choice. New traders explain that small time frames help them “see” the market better. “It’s like dialing in to a finer grain,” one trader said. Moreover, the smaller time frame also seems to help with risk. “I can place tighter stops and not lose as much.”
All this seems rational, and to a certain degree it is. When bar size is smaller risk can be controlled more tightly. The problem, however, is that as time frames become smaller, the noise level increases and can easily cancel the supposed benefits.
Systems developers strive to reduce noise in their market models. They use derivatives of price, such as moving averages, to help filter normal market turbulence. They find that price alone can be too noisy and cause costly whipsaws and missed trades.
The same can occur with too small a time frame. In a one-minute S&P chart, for example, many patterns look like great set-ups, but aren’t. They are illusory. A one-minute chart shows a clear long setup, for example. But as soon as it is taken it produces a loss, swamped by the movement of the higher time frames. That one-minute setup was just noise.
Why It Can Be Harmful
This is frustrating, but for the newer trader it can be more than just frustration. The newer trader may never learn what truly good trade set-ups look like when small time-frame configurations disguise themselves to look like tradable patterns. One master trader says that trading off the one-minute chart is like being a World War I soldier. “Your army is in the trenches and each time a soldier sticks his head up, he gets picked off!” Trying to trade off a small time frame may feel more comfortable, but it may also lead to failure.
A somewhat higher time frame can help a trader filter out much (though never all) of the noise and give the individual the chance to learn valid set-ups.
It can be hard to convince a newer trader to step up a time frame. Usually, this is due to the seeming rationality of the small time frame. Some may also resist a larger time frame because they fear loss or want to be right (both significant psychological barriers to competent trading). Here, the small time frame is used as a protective devise to avoid loss and shield the ego. Unfortunately, this is likely to cause even more problems.
What Traders Should Do
If you are trading on a very small time frame and are frustrated with your results, try stepping up in time. Check this out for yourself. Try it in simulation trading first. See if it makes a difference, both to your equity curve and to your all-important trading psychology.
Trading time frames are just one ingredient for successful trading. Confidence and consistency can be learned by developing your trading psychology edge. To learn more, you are invited to visit the author’s website where free resources, a blog on chart reading and trading psychology, and other key elements of trading performance may be found.
