Most day traders find it hard to show what the best way to determine time intervals for their trading strategies is. Too often, traders blindly pick up a timeframe some ‘guru’ tells them they should use, or use some sort of deceptive technical method, like Fibonacci numbers. This might lead to not getting consistent results, being under extra stress, and taking on higher risk than is actually needed. Without an understanding of the right interval, traders are likely to find themselves rushing into trades or taking more risk than necessary.
Success in day trading involves making quick decisions, managing risk adequately, and understanding the volatility of the market. The time frame used—for instance, 2-minute or tick charts—will present advantages in one way or another, based on different experiences, account size, and even risk tolerance. However, to date, most traders have not optimized this key element well enough, either due to missed opportunities or financial losses.
The key to success in day trading is the choice of the best time interval, which will be in full accordance with your risk management strategy and trading speed. In this article, you will learn how to determine the best time interval for day trading, with regard to money management and the speed of decision-making, through a step-by-step guide that will enable you to combine your trading style with the ideal timeframe.
Understanding Time Frames – The Very Basis of Day Trading
The best time interval to choose for day trading does not come from a one-size-fits-all formula. In fact, each different interval offers its unique advantage based on what you want to get from a trade and how much risk you are willing to tolerate. But one thing is sure: time intervals change everything—from the amount of risk you take to how quickly you have to act.
- The wider timeframes most commonly traded include:
- 1-minute
- 2-minute
- 5-minute charts
- Tick charts (which display a certain number of transactions rather than a time-based range)
But the real secret to success is not just in choosing an interval but actually being able to choose one that will balance risk management with the speed of decision-making.
Risk Management: First Factor to Consider
Risk management should be number one before you ever look at a chart. Your time interval—whether it be on a 1-minute chart or a 2,000-tick chart—will directly affect how much you risk on a given trade.
- If one is using a 2-minute chart, for example, and one high of the bar is $121.60, and the low is $120.61, one is risking nearly a full dollar on this trade.
- That might be okay if you have a bigger account. But what if you are working with a smaller trading account? In that case, risking this much may violate your money management rules, which commonly advise risking no more than 1-2% of your account on a single trade.
By contrast, using a tick chart—a 2,000-tick chart, for example—may present you with smaller risks. In that case, with the high at 121.20 and the low at 120.84, you are only looking at a risk of some 36 cents or so. That may be more in line with the size of your account and with your risk tolerance.
So, when choosing a time interval, the question should always be “How much am I willing to risk?”—let that be your guide, instead of some arbitrary rule you heard from another trader.
Speed of Decision: Can You Keep Up?
Another critical factor in the selection of the best time interval for day trading is speed. How fast do you know, analyze, and make a trade decision based on market information? The shorter the time interval or duration, the faster you have to think.
Okay, let’s imagine this: you’re on the 1-minute chart, the bars are just flying, and you see what looks like a double bottom forming. You gotta make a decision if you go long the very second that it forms. But your mind gets in the way with the time pressure, and you start to hesitate. Finally, you think your mind is made up, and by that time, the market has already moved, and now you’re chasing the trade—the worst place your trader’s mind can be.
This will tell you right away if the time interval is too fast for you, when you feel that using the shorter intervals rushes or stresses you out. The day trading technique requires split-second decisions, and not being confident in their making counterpoints on the longer timeframe of the 5-minute chart or even 15-minute chart.
If you have learned through experience how to make fast calls, then even smaller time frames such as the 1-minute or the 2-minute chart will suit you just fine. Everything depends on your ability to read the charts and execute your trades in real-time.
Finding the Balance: Speed vs. Risk
Ultimately, it comes down to finding an optimal day trading time interval, in trying to balance two very key components: risk and speed.
- If a time interval moves too quickly for you, making solid decisions, yet fits into your risk parameters, you’re out of luck.
- On the other hand, if an interval gives you ample time to think but you need to risk too much, you should make adjustments.
The solution lies in finding an intervening sweet spot where the amount of risk and speed is manageable. Maybe a single trader finds that a 5-minute chart fits him because it makes the bars slower, whereby the affair of a risk is less. For others, this may be a 2-minute chart, just with enough speed but not too much for his ability.
Myth Busting: There’s No Magical Time Interval
This is another persistent myth in the trading community: The belief that better time intervals exist, quite often based on Fibonacci numbers. In other words, some traders seem to believe that having a time interval equal to a Fibonacci number, like 21 or 34, will somehow afford them an advantage. Unfortunately, no magical time interval exists that has ever been blessed by the gods of trading.
The best time interval is the one fitting your personal risk tolerance and speed of decisions in combination with trading strategy. Full stop. Anything else is just noise.
Using Tick Charts: The Unthinkable Alternative
Tick charts offer an interesting alternative to time-based intervals. Rather than form a new bar every minute or every five minutes, a tick chart forms a bar after a certain number of transactions (otherwise known as “ticks”). For example, a 1,000-tick chart will show a new bar after 1,000 trades have been executed, regardless of how much time has actually elapsed.
This type of chart can be very helpful for day traders who would rather focus on the action within the market than by a time-based scenario. Since tick charts denote actual trading volume, they can provide a clearer view of the market’s strength and momentum. If you find time-based charts too slow or too fast, then give it a try at the tick charts.
Choose: Which Time Interval is Right for You?
So, how to select an optimal time interval for day trading?
- Assess Your Risk: Start by defining your rules of risk management. How much are you willing to risk per trade? Choose a time frame in which the high / low of the bars reflects your acceptable level of risk.
- Speed Assessment: Can you make the decision fast enough when you are under pressure? If not—avoid very short intervals, such as 1-minute or tick charts. Find a time interval that allows you to think and not rush.
- Test and Adjust: Don’t stay with the first time frame you try. Experiment with various charts—2-minute, 5-minute, tick charts—and discover which one feels right for your trading style.
Conclusion
The choice of the best day trading time interval does not concern diving into popular charts or following myths regarding Fibonacci numbers. It’s similar in some ways to driving, where you need to find that perfect balance between your risk tolerance and decision-making speed. By focusing on these two factors, you’ll be able to select a time interval that enhances your trading performance rather than hinders it.
Now that you have an understanding of the optimum time interval usage, you are set to make more informed and confident trading decisions. Take this knowledge and harness it within your trading strategy.
