Choosing the proper time frames can help us predict and refine our strategies by identifying:
- Speed of the Market (trade temperament)
- Proper Stop Loss Size and Target Size (risk & trade management/tolerance)
- Trade Frequency (# of trades/opportunity)
In the financial markets, a time frame is a period of time in the market that you use to identify trends and ranges. There are two main types of time frames we examine to determine whether a strategy is viable.
Linear time frames are fractals that are constant across all markets. They represent the same fractal pattern regardless of the market they are applied to. An example of this is time charts (second/minute/hourly/daily/weekly/monthly/yearly).
Nonlinear time frames are fractals that are not constant across all markets. Their representation is market specific depending on the variable being measured. We use these for range charts in which the bar completes after the price has covered a certain numerical value of the range in ticks.
Range charts are market specific because each day each market has a different average daily range/volatility. This is common especially during different market sessions (fast/slow) when the range is either high or low.
Examining these time frames and ranges charts will help you determine entry and exit points in your trading strategy. Most professionals will examine at least two-time frames before qualifying a trade (for example, a 1-hour chart and a 15-minute chart). By examining more data, you can help to ensure you aren’t inferring a trend or range that isn’t really there. As you well know, an incorrect analysis can lead to fake-outs and costly mistakes.
We do best to examine our strategies on multiple time-frames and charts to confirm our theories and build them into a strategy we can use on a daily basis. However, there is such thing as too much data! We usually suggest looking at no more than 3-4 charts at a time, otherwise, your data can become overwhelming to look at. Finding the perfect balance that works for you is the most important thing for every trader.