One of the main problems of a beginner trader is the lack of money. The problem they should face is choosing the right timeframe for trading. But as you know the markets change. Sometimes when the volatility changes you have to adapt the trading strategy or to change the timeframe you are trading on.
Vulnerabilities of using fixed stop loss and take profit
I think the most vulnerable trading method is using the fixed stop and profit target. Assuming a trader feels comfortable risking a certain amount of money on a certain timeframe. When the volatility increases the trader should decrease the timeframe or he should change the trade management or stop trading for a while.
Lower timeframe doesn’t necessarily mean more money
There are different opinions about the lower timeframes. Some traders affirm that the intraday movement is just a noise. Other traders affirm that intraday moves can be exploited to generate more profit. The charts look the same as on bigger timeframes. I always had the opinion that trading the lower timeframes you can make more money, because you can find more opportunities. But when you trade the one minute chart you may realize that the price is moving too fast and you can’t manage to take all the signals that a trading system generates. Unfortunately, most of the times, you will not be able to enter the trades that move fast in your direction. Keep in mind this when testing the trading system.
Lower timeframe doesn’t necessarily mean better opportunities
Some traders think that on the lower timeframes they can make more money, because there are more opportunities. It’s obvious that the same system will give more trading opportunities on the 1 minute chart than on the hourly or daily chart. But when you test a method on two different timeframes you may realize that on the lower timeframe there will be more losing trades, because you may find more choppy situations. You will have to use more filters to achieve better results.
Lower timeframe doesn’t necessarily mean lower risk
Lots of traders choose to trade lower timeframes because they think that on the lower timeframes there is lower risk involved. This is true partially. The trade will require a lower risk in terms of money but if you make more trades and if it happens that all of them are losing trades. You will have a bigger lose. For example if your risk on the daily chart is $1000, but the risk on the 10 minutes chart is only $250 you may think that it’s better for your account to trade on the 10 minutes chart. If you will have 4 consecutive losers you will lose exactly the amount you would have lost if you traded the daily chart, plus the commissions. Take into consideration that in this example I assumed that you traded one contract on the daily and on the 10 minutes chart. If you risked the same amount in percentage, so the risked amount per trade was $1000, than four consecutive losers would give you a $4000 lose. I’m not encouraging you to risk more per trade and trade the daily charts. You can use the micro account if you trade FOREX, you can reduce the number of shares if you trade stocks or you can find a filter for your setups. This way you’ll increase the percentage of winning trades and you will make fewer trades, so instead of doing five trades a day you may do only five a month, this way you will reduce the risk and will improve your results.
A profitable trading system on a daily chart isn’t necessarily profitable on intraday charts
Lots of traders fail because they simply try to apply on lower timeframes the rules they find in trading books, that where meant for the daily or weekly charts. Most likely they will not work on the lower timeframes, especially if the method is based on some indicator and not on the price action. But newbie traders will try to trade using that rules without even testing them. Someone do it to reduce the risk, others because they believe that they will make more money, others because they are not patient and they want more action. Just because the chart looks the same, it doesn’t necessarily mean that the system will give you the same number of winning trades. So it’s a wise thing first to test your trading method before using it on other timeframes.
The spread and commissions
On the lower timeframes there may not be enough volatility for you to make money if you take in consideration the commissions or the spread. The movement looks the same, but the amount of pips is very different. Choose the optimum exit strategy.
Conclusions
In my opinion, a valid reason to trade the intraday charts is if you can’t afford to risk the amount required on the bigger timeframe. This can be dealt with easily by using a micro account FOREX broker. You should trade on the timeframe that best fits your temperament and is compatible with you risk tolerance.
