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Question: What is the Best Interval for Day Trading? Part 2

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This may very well be the most common question I receive. I wrote a blog entry about this same topic on July 13, 2007 in which I used the question to share why I prefer tick intervals to minute intervals for day trading. But now it’s definitely time to address the question head-on. So here’s how I decide on the chart interval I’m going to use for any given market. I’ll use the example of tick charts, but it applies to minute charts as well.

You will be looking for the best chart interval for your “setup chart” (the time frame where you identify the setups you trade). Once you find that, you simply multiply that time frame by whatever number you choose for your confirmation chart (the next higher time frame). I always use a confirmation chart that is 3 times the interval of my setup chart.

You start with your money management rule of what you have decided will be your maximum risk per trade. Usually this is a percentage of your total trading account. The number you choose will depend on your own risk tolerance, but is typically between 1/2% and 2%.

Simply start with any tick (or minute) increment and then looking at a historical chart, you examine where your entries and stops would be on that chart. Would a total loser be less than your maximum risk per trade?

Look at 20 or 30 entries:

If a lot of them are more than the maximum risk, then you need to go to a shorter time frame.

If they’re all less than the max risk, but a lot less, then you need to go to a higher time frame.

Get as close to your max risk without going over it at least 90% of the time. This gives you the best combination of keeping your losses small, and keeping the “noise” of a short time-frame to a minimum.

Just keep adjusting the time frame until you find the interval that best fits those guidelines.

This is the BEST way to find the right interval for you. But there are a couple of other things to consider:

1. If your trading account is very small and your maximum risk is a small percentage of that, then you may have to use an interval that is so fast that it’s very noisy. Obviously that’s not a good situation and the only way out of it is to have a larger trading account. Many traders are simply underfunded and this can be a large part of the reason for their failure.

2. The faster the time frame, the less time you have for identifying and entering a trade. This can result in missing entries. How fast is too fast? The answer to that varies from person to person. It depends on how fast your mind and fingers are! You’ll only know that by trading and finding out for yourself. But if you find yourself having a hard time getting into trades that you see, you may want to go to a higher time frame.

3. The psychological need for trading frequency. If you go to a chart interval that is too long, then your trade frequency may get beyond your attention span. Longer-term intervals are good for proving more accurate signals, but they provide fewer trades in a given period of time. This can lead to missing trades, not because the market is moving too fast, but because there is so little for you to do, that you get distracted and don’t see the setups when they come.

4. You may also want to use an interval that is very popular. This especially applies to minute charts. 5 minute charts and 60 minute charts are very common time frames and it can be helpful to use them simply to see what everyone else is looking at.

Some traders use what I call “magic numbers” for chart intervals – usually Fibonacci numbers – thinking they have some significance. In my opinion, that is a completely meaningless way to choose a time frame.

The above suggestions will provide a chart interval that is based on finding the time frame that is the best intersection of sound money management principles and your own trading psychology needs.

That’s a “meaningful” way to find the best time frame for your charts.

Who “Ticked Off” the Market?

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In case you haven’t noticed, the markets have made a slight turn for the worse.

Some would call it a NOSE DIVE!

Volatility was very slight as the market was moving up, but now that the market has turned down, volatility has increased dramatically.

Note the increase in the range of the bars in a short period of time as the market started moving down on the S&P 500 chart below.

What could account for this?

A case could be made for volatility cycles, but they are so irregular that it’s tough to find any meaning or predictability in them.

There’s another, more fundamental, issue that may be causing this increase in volatility, especially since it has been isolated to the downside.

On July 3, the SEC’s elimination of the uptick rule was put into effect.

The uptick rules was established in 1934 and stated that a stock could only be shorted (sold before bought) if its current price was higher than its previous price.

The purpose of the rule was to prevent traders from artificially driving stocks down and then buying them back at lower prices.

3 years ago the SEC began a pilot program in which it suspended the uptick rule for some high volume stocks. The experiment was designed to determine if eliminating the uptick rule would have an overly negative impact on stock pricing.

The results of the pilot program were seen as favorable and so the uptick rule was officially eliminated on July 3rd of this year.

Exchange Traded Funds such as the SPY and QQQQ have never been subject to the uptick rule.

Proponents say that the uptick rule imposed an artificial hindrance on pricing, and that it is best to allow the free market to determine stock prices.

Did the elimination of the uptick rule contribute to the dramatic increase of volatility to the downside in the last month?

A look at the $VIX index shows that this is by far the greatest volatility we’ve experienced in several years.

Perhaps we’ll never know for sure if the elimination of the uptick rule is the cause, but it’s something to keep in mind as we continue to watch what could be a new ability for the markets to move down faster and with less hindrance.

S&P 500

Mile High Trading

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This Saturday I’ll be conducting a 4 hour mini-seminar for the Denver Trading Group at the Radisson Hotel Denver Southeast in beautiful Colorado.

I’ll be including a special in-depth presentation on trading psychology and how to overcome your personal psychological obstacles.

If you live in the area, join us for an in-depth view of my trading methodology.

If you know anyone that lives in the area, pass along the word!

The Denver Trading Group (DTG) is one of the most active and exciting trading groups in the country.

Live presentations are given by well-informed guest speakers and are scheduled on at least one Saturday each month, starting at 9:00 a.m.

If you don’t live in the area: The Denver Trading Group will be scheduling guest speaker presentations and SIG meetings each week in the DTG hotComm room.

You can get more information about the Denver Trading Group at their web site: http://www.denvertradinggroup.com


New York, New York

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“If I can make it there

I’ll make it anywhere

It’s up to you, New York, New York.”

Barry at the Nasdaq

For some reason, people have a relationship with New York – good or bad. In many, many movies and TV shows over the years, New York is actually a character, almost a person in the script.

I totally get that.

I just returned from a wonderful 2 week trip there … and boy was it a blast.

We saw 3 Broadway plays, ate at wonderful restaurants, took a horse and buggy ride through Central Park … and downtown (where else can you take a carriage ride through the middle of a huge city?), had lots of New York style cheesecake, New York style pizza and New York Delis, and even went to Mars (there’s a cool restaurant that makes you feel like you’re on Mars, complete with aliens – great for everyone, not just the kids).

Our hotel was just blocks away from Times Square, so we were in the thick of it.

New York is my favorite city in the world. I absolutely love it. Even though I don’t visit it very often, I consider it my home away from home because I resonate with it so much.

Kind of surprising since my introduction to New York was literally a horror story.

It was back in 1964 and I was only 5 years old. My parents took me there for the World’s Fair. A wonderful trip … except for one incident that would stand out as one of the traumatic in my life.

One day, among the THRONGS of people, my parents were wrestling with their tokens and the subway turnstile. They told me to duck under the turnstile and save them a seat on the train (in retrospect: “What were they thinking?!”).

Being the perfectly obedient child, I did as they said, and after getting on the train, the doors closed behind me … and my parents were still back at the turnstile … SCREAMING!

The train took off with me in it, going God knows where.

There I was, 5 years old, all alone in the middle of New York, surrounded by masses of people, and all alone.

I had a type of “life flashing before your eyes” experience. Except it was my future life. I still remember vividly imaging what my life would be like from that point on.

I would grow up an orphan living on the streets. I befriended a scruffy homeless dog with 3 legs and we became pals and hang around together for the rest of our days. We went to trash cans to find food and beg for the rest. The story goes on … it was like a dream, and I still remember every bit of it.

After my daydreaming, I came back to reality and started looking around the car for an adult to help me. As I looked up for help, I found that everyone was staring at me (I had been balling my eyes out screaming “Mommy, Mommy”), but as soon as our eyes met, their faces quickly turned away!

That was the loneliest moment of my life.

I had no idea what to do. So I just stayed on the subway train and figured I’d stay on it until someone kicked me off because my Mother always told me to stay put if we got separated (she never thought that I’d be “staying put” on a moving object!

After several stops, a woman came up to me and asked if I was lost. She took my hand and got me off at the next stop where we waited for my parents to arrive on the following train.

The kindness of strangers.

It was a reunion of unimaginable proportions.

My Dad offered to give the woman some money for her help. But she declined saying, “I wouldn’t have done it, but I didn’t have anything else to do,” and then she walked away.

Nice.

You’d think after that experience, I’d be sour on the city. But for some reason, I never held it against her. In some strange way it actually was the beginning of an intimate relationship.

My friend New York used to be loud, rude and obnoxious, while at the same time being wild, exciting and unpredictable. Exotic, untamed, and not a little “crazy” … but that can be very attractive.

It would be unrealistic to think that I could change New York. That is beyond my power. It’s like getting into a relationship with a person and then trying to change them. The only power you have is to change yourself … and that’s hard enough!

Over the years New York has done a great job of changing herself.

She’s had her rough edges smoothed. Still exotic, but more refined and polite now. Heck, they even have street signs threatening a $350 fine for honking your car horn! Am I in the right city?

And who ever thought that smoking in a NYC restaurant would ever be outlawed?!

It’s nice to see the city “cleaned up.” You feel safer walking the streets, it’s cleaner, and there are many, many benefits.

So what does this story have to do with trading?

Just this …

Most every trader’s initial experience with trading is a negative one. They lose money.

Money is a very emotional thing to people, and the loss of it impacts us tremendously. We often personify the “the market” and accuse her of taking our money. It’s a bad way to begin a relationship.

If you read the stories of famous and successful traders in the landmark book Market Wizards [disclosure: affiliate link], you will find that most of them had a financial crisis with the market early in their career … some of them losing everything they had.

This “Market” we are in relationship with is loud, rude and obnoxious, while at the same time being wild, exciting and unpredictable. It’s exotic, untamed, and not a little “crazy” … but that can be very attractive.

Most people look for a way to “tame” the market by finding the perfect indicator, price pattern or strategy. But that’s not the path to success. The market is beyond your power. The only way to become a successful trader, is to tame yourself!

Keeping control of yourself, you can control your own destiny. Then you’re free to enjoy the market in all its wildness and unpredictability.