What time frame ought to your trading system be used?
The harder it is to create an effective system, the shorter the time span.
In other words, creating a trading system for a 5-minute chart is more challenging than creating one for a daily chart.
On the shorter timescales, there is a lot more noise.
It can be a difficult undertaking given the enormous amount of data you would need to evaluate the system over years and years of various data.
Less risk and less reward per transaction are frequently associated with shorter durations.
Striking a balance between the size of your trading account and the level of risk you are willing to accept is a good idea.
The New Traders Trap
Let’s take a look at what’s called the “New Trader’s Trap”:
1. The smaller your trading account, the smaller the time frame you should trade.
2. The smaller the timeframe, the more difficult it is to trade.
Do you see the trap here?
In an effort to make a quick buck, new traders frequently enter the trading industry with very little capital.
Because they believe intraday trading is the best method to make money, they trade tiny periods.
In an effort to scalp the market for a few pip changes here and there, they begin trading on a 1- or 5-minute chart.
As a result, individuals find themselves in a very challenging situation because they are trading during a very challenging era when they are least experienced.
They made preparations for an immediate failure.
On a daily time frame rather than a 5-minute chart, profitable trading methods are significantly simpler to create.
We advise beginner system traders to create trading systems on daily charts as a result.
It makes no difference if you ever intend to trade those timeframes. You do it to hone your self-assurance and system development abilities.
Starting on the daily chart will increase your chances of creating a profitable strategy compared to starting on the 5-minute chart.
Why defeat yourself by hitting your head against a wall? Increase your competence and self-assurance before tackling more challenging intraday timeframes.
Should i Scalp?
Many system traders are curious about scaling. The challenge of making regular, minor trades from the market with low risk is alluring.
When you scalp, it’s typical to trade on a short time frame, often five minutes or less.
Opening a position with simply a few pennies of profit is the goal.
The draw is that since we are trading over such a brief term, your risk is low, allowing you to use a smaller trading account.
You will usually find setups with greater win rates that occur more frequently than those on higher timeframes like hourly or daily.
With scalping, trading opportunities tend to be more frequent, which has the potential to produce significant cumulative gains relative to your initial account amount.
Scalping is exceedingly challenging for retail traders to master.
The majority of retail traders that attempt scalping fail.
We wouldn’t advise it if you’re new to trading. Why?
Trading in these periods puts you up against high-frequency trading (HFT) companies that employ automated trading programs (algos) created by a group of Ph.D. geniuses.
The transaction cost in both the spread and slippage is another important barrier.
The bid-ask spread is the difference between what a buyer will pay and what a seller will receive at a specific moment in time.
Your broker sells to you for a higher “ask” price while purchasing from you at a lower “bid” price.
The prices that your broker “quotes” are the bid and ask prices.
Transaction costs are represented by the bid-ask spread.
If transactions are conducted at the given prices, the quoted spread calculates the cost of executing a “round trip” (buy and sell)order.
Half the spread is a common unit of measurement for transaction expenses for a single deal.
50% of your gains will go toward paying the spreads if you pay a 2-pip spread to join and leave a transaction and generate a 4-pip profit.
Scalping results in a lower profit per trade, but your expenses stay the same as you drill down to ever-smaller time frames.
A 400-pip gain would cost 0.5% of profits to cover spreads if you traded on a slower time frame, such as a daily chart, as opposed to 50% in the preceding example. What a significant difference!
Transaction expenses and slippages reduce your profits by an increasing amount as their negative impact develops.
A single pip of slippage is hardly noticeable when you hold a transaction for several days with an average profit of $100 for each trade.
A single pip, however, might mean the difference between life and death on a scalping system.
Your margin for error is very small when latency, computer, and internet problems are included.
Again, in longer periods, it makes little difference whether you abandon a transaction immediately or after a short period. Not so in the world of scalping, where everything is extremely delicate and your margin for mistake is quite little.
Finally, if you’re new to developing trading systems or don’t already have profitable live trading techniques, initially concentrate on developing systems on longer timescales