Lessons from the Pros

India Markets

Framing Time

As a trader and an instructor, I am constantly being asked, “What time frame is best for trading?” The answer is a personal choice.  There is no one time frame that stands out as being best for all traders. Just as we are all different as people, we all have different trading personalities.

The main consideration we must have when selecting a trading timeframe is our risk tolerance.  In our courses at Online Trading Academy both in our centers and online, we teach that in order to set stops properly and evaluate the risk of the trade, we must place our stops on the opposite side of the level that allowed us entry to the trade.

If you buy near demand, as you are supposed to, then your stop should be on the opposite side of that demand area.  The stop is there to protect your capital in the event you are wrong in the trade. Violation of the demand level means you are wrong in entering a long position.

demand zone

The same rules apply when we short near supply.  You want to place your stop above the supply level to protect your capital in the event that price breaks the supply and continues in an uptrend.

bwendell 20130416 framing - supply zone

This is where the calculations come in.  When we look at a chart of a stock on a fifteen minute chart, we see that the demand and supply zones are narrower in price range than the zones on a daily chart.

compare supply

When you are trading, you have to be comfortable with the risk that you are taking, otherwise, you should not trade on that security or that timeframe.  In my example of two supply zones, a trader with a position risks Rs. 48 per share on a daily chart and only Rs. 9 on an intraday trade on a 15 minute chart.  Obviously with a longer term trade, the rewards increase but so do the risks.  We also add the overnight risk of gaps if you intend to trade longer term.

As a trader, we must look at the average ranges of supply and demand levels for our stock and determine if we are comfortable with that risk.  If you are not, then there are several things you can do:

  1. Reduce share size for the position – Always my first step if I am unsure of a trade or my trading abilities after several bad trades.
  2. Look for a lower priced stock – They will typically have smaller zones due to lower volatility
  3. Reduce the timeframe you are trading on – I start with the largest timeframe I feel comfortable with and ease my way down if I can’t handle the risk.

Be smart; successful trading is not about going for the big wins. It is about consistency.  If you are too nervous about the risk you are taking, you will make mistakes.  But, if you are trading within your comfort level and taking only small losses, you are well on your way to trading success!

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.