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.

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  7. This is the best discussion I have read/heard regarding how to select the chart interval that is best suited for your risk parameters AND your trading strategy. Clearly, your strategy has to be effective on the chart interval you select, but working ‘backwards’ from your total risk per trade is very sensible. For most strategies, multiple contracts are very helpful in trade management, so this process will be beneficial while keeping total initial risk in mind. Many traders are so focused on how we can squeeze the most out of those big trends, and end up minimizing the excessive risk and ongoing risk management of trading. Thank you, Barry.

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