jmot’s Blog

Trading Short Timeframes Vs Long Timeframes

In my last post, I discussed about how can one know that he/she is trading a unsuitable timeframe. And I found 2 other articles that supported my claim:

Glen De Vadder wrote about how can one determine which chart timeframe is suitable. He broke down chart timeframes to 3 main types, namely, intraday, swing/position and long-term. In summary, aspiring traders will a job should go for swing/position or long-term timeframes - hourly charts and above.
The team from PFX is more for trading long timeframes. They mentioned about the spread - yes, trading short timeframes incur more trading cost in terms of the spread because more trades are taken and of course, the emotional stress that comes along with short term trading.

One interesting point to note. Both articles mentioned about rollover, but from a different standpoint. In my interpretation, rollover is a double-edge sword. Whether you collect or is charged a rollover depends on the position and the currency pairs that you are trading. So we will have to take note of this if we are holding our positions overnight.

One point that is still not addressed any where is: whether trading short timeframes or trading long timeframes is more profitable?

I would think they are equally profitable. Let’s see if we can convince ourselves.

See the USD/JPY daily chart below, the 60-day average true range (ATR) is around 90 pips to 200 pips

The 60-day ATR for a 5 min USD/JPY chart is around 15 pips to 5 pips (See chart below).

So when trading the daily charts, my stop loss would have to be at least 200 pips while my stop loss for the 5 min charts would just have to be at least 15 pips.

Let’s say I have a strategy that gives me 1:1 risk-reward ratio with a success rate of 60%. In addition, let’s say the strategy, when applied on the daily chart, takes 3 days to close with a winner and makes 200 pips. In order for me to make 200 pips in 3 days on the 5 min chart, I would need to make 200/15 = 14 winners. But all in all I have to make 24 trades since 60% of my trades are usually winners.

So I would need roughly 8 trades per day on the 5 min charts to match a win on the daily charts. So which is more profitable? In my opinion, once I made 200 pips on the daily charts, it is a done deal. Imagine I have to make 24 trades on the 5 min charts to make that same profits…

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2 Comments Already

Ray Said,

November 19th, 2008 @1:04 pm

I imagine working these charts at such a pace has been a blast in this market. I am never in a trade more than 24 hours right now it seems.

Brendan Said,

November 20th, 2008 @10:44 am

I like the part where you mentioned about rollover.

Using the high yield currency pair AUDUSD as an example:
If you long AUDUSD , you have positive carry, that means you earn interest.
If you short AUDUSD, you have negative carry, that means you need to pay interest.

This is an area which my colleagues and I have great and long discussions about. The senior traders do not believe in shorting AUDUSD because we need to pay interest.

While in my view, if I think AUDUSD will fall, I should short. Capital gain will be more than enough to cover the cost of interest.

Who is right? I am right, just look at the downtrend of those high yield currencies: AUDUSD, NZDUSD. If you do not short them, you miss out a long of great trading opportunities.