Written with @KynaKosling.
Most arguments on 𝕏 come down to participants having different timeframes.
Timeframe choice is vital. Your rules of engagement are largely a downstream effect of your timeframe, which you choose based on your risk tolerance and reaction time.
Many factors contribute to success or failure in the markets, but one of the most important is to know your personal strengths and weaknesses.
Only then can you figure out how and when to leverage them.
Here’s what you need to consider when choosing your timeframe:
The table above provides an overview of the trade-offs of longer-term vs shorter-term timeframes. Neither is inherently ‘good’ or ‘bad,’ but there’ll be a right timeframe for you.
The next table shows the concrete trading styles that broadly correspond to each timeframe, and the trend they’re primarily trying to capitalize on. Don’t be too rigid about this table—it’s only intended as an approximation, highlighting the essence of each timeframe.
Personally, I consider swing trading the perfect timeframe—but only if the market allows it.
Professionals never tell the market what they want. Instead, they look to take what the market will ‘give’ them—although they will, of course, have an idea of the next potential level of resistance or support.
Manage risk, then see what the market gives you.
My price target is always ‘higher’ (or ‘lower,’ for a short), but the market is the true master: Any swing trade must first survive as a day trade.
If I don’t have a profit cushion by the end of the day, I may reduce my risk by selling some shares. I may then repurchase them the next day if the trade is still there.
This approach reduces overnight risk, because remember:
Risk is a double-edged sword, particularly overnight risk.
Catastrophic losses work against you mathematically, so avoid them at all costs—including via gap risk. However, while things can go wrong overnight, you can control your risk with a little common sense:
Don’t hold negative positions overnight as a swing trader, where even a small gap against you can leave you with a larger loss than planned.
Don’t hold excessive share size overnight, particularly not on volatile stocks or other assets with more gap risk.
When overnight risk is heightened due to, for example, an event catalyst (such as earnings) or when the stock is nearing a key level of interest (which reduces the potential for further profits).
Risk always cuts both ways: Holding a winner overnight can give you the opportunity to cash in on continued profits. This opportunity comes at the expense of those who missed out on the previous day’s action, then chase the stock the next day, particularly near the market open.
Overnight gaps in the direction of the trend (and therefore in your favor) is what allows swing traders, position traders, and investors to make fewer decisions, while increasing their profit potential.
Only you can figure out the best timeframe for your personality.
Many people are drawn to the shorter timeframes—the market tries to tempt participants into making fast, emotional decisions intraday.
Be aware, however, that extremely few people succeed as day traders in the long run. Day trading involves quick decision-making and frequent opportunity for emotions to creep into those decisions. Long-term success as a day trader requires exceptional concentration levels and discipline.
As a guideline, the longer the timeframe, the more participants make decisions based on the market’s longer-term message, which tends to be clearer and more reliable. Plus, the fewer decisions you need to make, usually, the better your chance of achieving consistent profitability.
However, the longer your timeframe, the more tolerance you need for drawdowns when the market inevitably goes through a correction.
Finding the right timeframe for you requires experimentation.
As you experiment, you’ll likely make a lot of mistakes as you try to figure out what resonates best with you, so be sure to trade smaller during this learning period.
To help figure out your timeframe, ask questions like:
⚓ Are you a fast or a slower thinker?
Can you quickly observe and objectively make decisions?
Or do you get panicked when you must act on shorter timeframes, but feel the need to plan each detail more slowly and methodically?
⚓ How many ideas do you want to generate?
Can you come up with a constant stream of tradeable ideas?
Or do you prefer to be more selective with your ideas, waiting for fundamentals and technicals to align?
⚓ How much time do you have to commit to the markets?
Do you have significant other commitments, like a day job or family responsibilities? If so, higher timeframes allow you to achieve decent returns without spending much time looking at the market.
What is your time zone? If the market you trade is open while you’re asleep (or otherwise unable to monitor the market), you may be more drawn to higher timeframes, which don’t require you to watch the price action from market open to close every day.
⚓ What is your capital base?
If your account is smaller, you may want to be more proactive about limiting drawdowns while keeping your capital in trending names to compound your capital faster.
If you have a larger account, you may be happy to be more patient in exchange for lower-effort, longer-term compounding.
Your timeframe isn’t a ‘marriage’ decision.
For example, as your capital grows, your priorities often change. They often also change with age. You may then want to transition to a higher timeframe so you can place fewer trades.
You may also want to transition to a higher timeframe if you have a decent ‘profit cushion’ on a trade—professionals aim to get into a position of strength from the start with a well-timed entry.
In the early stages of a trade moving in my favor, I often take a partial profit to give me a little cushion, then raise my stop loss. That way, if price rapidly reverses, I end up breakeven or with a small loss on the overall trade.
However, if the stock really starts moving, I may widen the stop loss after taking another partial to try to capture more of the bigger trend. Here's an example.
When I bought this stock (green arrow), I intended to hold it until the stock stopped making higher-highs and higher-lows above a rising 5-day simple moving average (SMA).
However, because I had cushion when it eventually broke the 5 SMA (first red arrow), I only sold a portion of it. I then transitioned to a higher timeframe, holding half the balance until the 10 SMA broke (second red arrow) and the remaining balance until the 20 SMA broke (third red arrow).
Large accumulated profits gave me the flexibility to hold a winner for longer.
I adjust my approach based on how the trade develops, while following my rules of engagement.
These rules work for me. They may or may not work for you—remember to always make the ideas your own—but I hope this provides insight into how I think, and demonstrates how trading is an art.
You need to look at the context and nuances around your trade idea, while using certain hard guidelines as your framework.
Capital preservation is your priority early in a trade—but once you have accumulated profits that give you breathing room, you can choose to change your focus to maximizing your gains while still managing your risk.
P.S. I share these types of trade and risk management techniques for current trade ideas every day with Alphatrends members.
