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Question: What is the Best Interval for Day Trading: One Minute? Five Minute? Answer: NO MINUTE!

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stock-market-1254798-639x695“What’s the best chart interval for day trading?”

One of the most common questions I receive is regarding the best chart interval for day trading. This question often comes into the “Ask Barry“ service.

This is a service where anyone can ask me a question about the market, technical analysis, trading, money management, etc.

You can use the form in the right column of this blog (scroll down a bit to find it). I personally respond to all questions by sending you an email, and some questions get posted in this blog.

Today’s question (which has come in several forms from several different readers):

“Yo Barry, I notice in a lot of the charts you post, you use tick charts. Does that mean your method is more for day trading than swing trading? What’s the best CHART interval for day trading? And what’s actually the difference between minute charts and ‘tick’ charts?”

Thanks to all who asked these questions. They’ve been common ones so I thought it was time to answer them publicly.

TICK CHARTS VS. TIME-BASED CHART INTERVALS FOR DAY TRADING

First, my method is definitely not more for day trading than swing trading. I’m a very active swing trader and use the same method for both swing trading and day trading.

Second, there’s no best chart interval for day trading, but there is one that’s best for YOU. Each has advantages and disadvantages. Evaluate them for yourself and choose an interval that fits your personal trading style, execution speed, degree of patience and risk tolerance.

  • Faster charts give you more trades per day and can lower your risk per trade. That’s at the expense of being more “noisy” (having more meaningless and false moves). This requires you to make faster decisions since the bars finish faster, especially in fast markets.
  • The slower charts (longer time-frames) grant you more time to make trading decisions. They have less “noise,” but since the point range of each bar is bigger, your risk per trade is larger. In addition, since they provide fewer trades per day, it’s easier to get “lulled to sleep” during long periods of insignificant activity.

Third, as to the difference between tick charts and minute charts, that’s going to take a little more explanation.

With most charts, each bar represents a period of time.

  • On a daily chart, each bar contains all the price action of that one day, and when the next day starts, a new bar is plotted.
  • With a 5 minute chart, each bar represents all the price action for 5 minutes, and when the 6th minute begins, the chart plots a new bar.

“Tick” charts are different in that each bar does not represent any particular amount of time. A “tick” is a “trade.” So every time someone places a trade, that is called a “tick.”

A 200 tick chart, then creates a bar that includes all the price action for 200 trades. Only when the 201st trade goes through the market, the chart plots a new bar.

  • If the market is slow, it could take 5 minutes for 200 trades to go through the market.
  • When the market is fast, it could take 30 seconds for 200 trades to go through the market.

So tick charts are a way of incorporating volume into the price bars and price formations themselves.

However, remember it isn’t really measuring volume directly because trades (“ticks”) will have varying amounts of volume. One trade could be for a single contract, and another could be for 50 contracts.

You can also plot “volume charts” in which each bar represents how many contracts (shares) each bar will represent rather than how many trades.

Which is better?

There is no objective answer to that. Each has advantages and disadvantages.

Some people prefer minute charts (1 minute, 2 minute, etc.) because they tend to form more traditional candlestick patterns.

My trading method isn’t dependent on any time interval, or whether you use minute charts or tick charts.

Personally, for day trading I use tick charts as my primary charts … but I do have a 5 minute chart that I’m always watching as well.

I personally prefer tick charts for 2 reasons:

  1. Tick charts tend to create more symmetrical patterns than regular minute charts. That’s because when the market is extremely slow, minute charts will continue to plot a lot of small bars that go no where. When the market is fast, it will create very long bars, because it can’t create a new bar until “time is up” (5 minutes, 15 minutes, etc.).
  2. Tick charts often create more narrow range bars than minute charts at turning points. This allows you to keep my risk smaller (because risk is defined by the range of the bars at cycle turning points in the market).

To see a VIDEO that demonstrates these differences in minute charts and tick charts, visit my page on YouTube at: http://www.youtube.com/profile?user=TopDogTrading

BELOW ARE A 2 MINUTE CHART AND A 200 TICK CHART OF THE SAME TIME PERIOD ON THE NASDAQ FUTURES FOR COMPARISON. Look at them and see what you think is the best chart interval for day trading.

CLICK ON THE CHARTS BELOW FOR LARGER IMAGES:
best chart interval for day trading

best chart interval for day trading

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Ask Barry: “Chat Rooms and Break Out Trading.”

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Here’s another question from the “Ask Barry” service.

This is a service where anyone can ask me a question about the market, technical analysis, trading, money management, etc.

You can use the form in the right column of this blog (scroll down a bit to find it). I personally respond to all questions by sending you an email, and some questions get posted in this blog.

Today’s question:

“I’ve traded for a few years actively and have not done well. I’ve joined a number or chatrooms that post great results but haven’t seen them during my time. I have noticed a change in intraday market setups the breakout and breakdowns are not easy to spot and when they do many times they reverse. Do you have any advice? Thank you.”

I’m with you brother. I’ve been in many, many chat rooms over the years and have yet to find one that I could follow with consistent profitability.

However, I did find a TREMENDOUS value in chat rooms. I learned that the best chat rooms to learn from are those that are free and that allow the users (not the moderators) to chat a lot.

These rooms are worth their weight in gold.

Here’s why:

I would just sit and listen (or watch their typing) and then compare what they were saying to how the charts looked. When you do this you are getting into the head of the loser, and that’s very valuable.

Not to be insulting, but the truth is that 95% of the users of those chat rooms are very poor traders and are definitely “losers” in their trading.

If you can listen to those people and, through repetition, learn how they read charts, it will help you to trade against them.

Also you want to watch out when you find yourself agreeing with them. That’s a great revelation for you because you can uncover your own “loser” thinking that way.

This may sound kind of silly, but I’m totally serious. I personally used this for 2 years as an exercise to improve my own trading and it really worked. When I watch a chart now I can almost “hear” what the losing traders are thinking at various points on the chart!

Regarding breakout trading … I’ve never been a big fan of it. One of my mentors taught me his method of breakout/down trading and it never felt right to me. So I completely abandoned 95% of what he taught me simply because it never made real sense to me and it didn’t fit my personal style and risk tolerance.

In my opinion, by the time a market breaks a level, you are late to the party. Most of the pros I know get in before levels are broken … and that’s certainly what I do.

Having said that, I have developed my own type of “breakout” trade that uses the expansion/contraction cycle along with cycles. But I only take it when I have at least 4-5 different energies aligned and even then I only risk 1-2 bars (which is all I risk on any trade).

I explain this trade in my later courses … sorry, but it’s too much to explain in a single letter like this.

Happy Trades,

Barry

Top Dog Hits Wall Street!

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Greetings Traders!

Just a quick note to let you know that I’m going to be in the Big Apple next week (July 2 – 6).

While I’m there I’m going to have a few extra hours to spare, so if you live in the area and would like some help with your trading …

I’m offering a few private sessions in the great NYC to any traders who would like to get together with me. These are designed to be one-on-one sessions (though I’ll meet with small groups as well) during which we can cover anything you’d like:

  • Go over some of your trades.
  • Talk about trading discipline and psychology.
  • Review your trade diary or help you get started with one.
  • Analyze any of the current markets.
  • Learn something new!

It’s wide open – anything you want – as long as it’s something I feel I can really help you with.

There is a cost, but it will be very minimal.

If interested, just send me an email at: barry@topdogtrading.com

Be sure to include your name, phone number and the best time to reach you. I’ll call you, we’ll talk about what you want to discuss, and then set a time and place to meet in the city that never sleeps.

Happy Trading,

Barry Burns
Top Dog Trading

The Russell Has Left the Building …

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For you day traders who like to trade the Russell 2000 futures contract (like I do), there was an important announcement today.

ICE (IntercontinentalExchange, Inc) announced today that it signed an exclusive agreement with Russell Investment Group to offer futures and options on futures on the company’s U.S. equity indexes.

ICE is the leading electronic energy marketplace and soft commodity exchange.

The Russell futures products currently trade on 2 other exchanges, and many day traders use the Russell futures for trading on the CME.

The transition from the other exchanges to the ICE will be completed no later than the end of August 2007.

The Russell futures and options on futures products will then be traded exclusively on the NYBOT (New York Board of Trade) which is ICE’s U.S. regulated futures exchange.

Read the full article from the ICE web site.

Read the Q&A pdf. document from the NYBOT.