in today’s article I will share with you “the Importance of Time” part II. For those of you who might have missed the first part, you can read it here.
The first educational article focused on why time is important for our trading, while the current article discusses how you can develop and incorporate time factor into your own trading plan. It will discuss step by step how time can be an integral part of your trading..
First of all, the benefits of having specific knowledge about time incorporated in your trading plan are, among others:
a) An improved, effective and more efficient trading psychology;
b) Your trading capital is not stuck in non-profitable trades, which in turn gives a trader the freedom to invest in available opportunities;
c) The odds of your trade developing into a winner and avoiding a (full) loss increase.
The time factor has 3 dimensions which need to be incorporated in your trading plan. The three factors are:
1) When is the trade entered?
- Which time frame(s) do you use for analysis;
- Which time frame(s) do you use for entries;
- At what moment do you actually enter: candle close or is it price related (Fib f.e.);
- At what point is it actually the best time or moment for you to enter the trade;
- When do you choose to trade?
A+b. time frame for analysis and entries)
It is a well known factor that traders should choose the time frames on which they perform analysis and the ones on which they actual enter trades. It is a very important aspect of a trading plan and the trader must not deviate from the time frames stipulated in the plan. It is my assessment that many traders do incorporate this characteristic. However, not all of them actually stick to that plan and, sometimes even subconsciously, deviate from it by taking an entry which is (more) based on a different time frame.
What is the ideal balance of time frames? It is a tough question, but in general though, using multiple time frames for analysis and two time frames for entries seems to me a good balance. Three to four time frames for analysis and two charts for entries give the trader a perspective of the market and ample opportunity to enter. Nathan has written an article about trading strategy for Forex, which has with more details about why looking at different time frames is important:
c. candle close or price)
There is nothing wrong with an entry which is purely focused on a certain price level. A Fibonacci entry is an example. In that case only a price level is needed to enter a trade and that is perfectly fine, although point d.) will show that including time factor does have benefits.
One warning for those of you who actually use candle closes for entry signals: wait for the candle to actually close! Many a trader is tempted by the bullishness of a candle and they “jump” in early, before the actual candle closes. This is time factor messing with your trading psychology and it is not desirable. Here are some reasons why traders might be tempted to make this mistake:
- The candle is about to close. The trader gets enticed to enter earlier with the argument that they think the candle will not change (much) in the mean time
–> wrong, the last minutes or hours could have substantial impact on the candle build and a significant change is always possible. This in turn impacts your entry price or maybe even your decision to take the trade;
- The bullishness of the movement has, or seems to have, a lot of momentum in it
–> wrong, in this case the trader is in fact using a lower time frame and is showing a lack of discipline to wait for the setup stipulated in their trading plan. The candle must close before it is useful for the analysis or entry strategy;
- The trader wants to get a better price, anticipating a continuation in their direction
–> wrong, once again, the candle can change before closing, and the trader is actually using a smaller time frame and deviating from the trade plan;
- The trader fears that the stop will become too large
–> wrong, a bigger stop can be justified if the target has a sufficient ratio related to the risk. If this ratio becomes unbalanced due to a large candle stick, then the best thing to do is to skip the trade and not enter.
d. Candle movement)
Having a time element incorporated in your trading plan, such as when to take a trade and when not to enter a trade, could be very beneficial for the trader after sufficient testing has been completed. Taking a trade based solely on price, without incorporating time factor, is also fine. The disadvantage of not using time factor is that a trade will take longer to develop than the trader (subconsciously) anticipates. Analyzing when a trade has more potential to materialize could therefore save you from a loss or a lengthy wait and hope mood, which is not good for the trading psychology.
There are various ways of implementing time factor.
Gann angles are one method how to use time in your entry (and exit). Basically Gann waited for important tops and bottoms to form on a daily, weekly, or monthly chart and drew his angles from these changes in trend. Each angle divides time and price into proportionate parts, the 45 degree angle (1x) being the most important. The steeper the angle, the stronger the price movement is. Read more here.
Other traders use Fibonacci time sequence as a method and filter for time factor. They wait for a certain Fibonacci number of candles to form before entering. An example could be to wait for a minimum of 13 (Fib number) corrective candles before entering a trade.
As always, a decent amount of back and forward testing is needed before actually using these components. Personally I do not use Gann angles or a specific Fibonacci time sequence for my trading. I incorporate a somewhat discretionary element into my trading plan. My view is a time-price combinational view. According to my own personal studies I noticed that impulsive moves do not travel more than 3, 4 or at maximum 5 candles. Taking an entry after 4/5 impulsive candles have completed could therefore be riskier. In my own trading I therefore wait for a decent corrective move (measured in time) to complete, but I do not use Fibonacci numbers in counting the number of candle sticks.
e. what times you trade)
1) A trader needs to have a clear plan regarding their trading times to avoid over trading. A time filter is a perfect tool for that. A trader must know:
- When to analyze the charts;
- When to actually take trades, and when not;
- When and how often the trade and its management are reviewed.
A trader must clearly decide when you do and do not trade and they must stick to these times. It is vital to gear the testing towards this time period as well. Having clear cut rules will avoid you taking trades too early or too late in the trading day, trading week, or trading year (depending on your style of trading). A scalper will focus on the best couple of hours within a session, an intra-day trader will focus on the best hours in the day, a swing trader will focus on the best day days of the week and month, and a position trader will focus on the best weeks and months of the year.
2) A final point is that each trading session has its own characteristics to be aware of: currencies tend to move more/less in different trading sessions. If you study the charts you can see that the GBPUSD has a lower average range during the Asian trading session than during the London session, while the AUD and the JPY move a lot more during that time frame. The trader must use that knowledge to benefit their trading strategy. A trending trader would do well for example by avoiding the GBPUSD in the Asian session.
2) When should the trade develop?
a) Beginning of the trade: Some traders, including myself, incorporate a trading plan characteristic which is geared towards the speed of a trade developing. In my own testing I have noticed that the statistical probability of a successful trade decreases if it takes more than 4-5 candles to move away from the entry level. The testing was done primarily on the 1 hour charts, with some measurements as well on the 15 minute and 4 hour charts. However, the concept seems to have value for other time frames as well. I encourage you to test it yourself on the timeframes you use when trading. For me this aspect is very important and I concluded that there is a positive expected value by including a time filter.
Not only will it help the Rate of Return at the end of the day, but it also supports my trading psychology because I have a clearly defined time limits:
- I know when to give a trade sufficient time and space for it to develop
- I also know when not to give a trade more time and space to develop
The end result: by setting up clear boundaries, I am able to create the needed patience and discipline, which are vital building blocks for your trading psychology.
3) When is the trader exited?
The exit plan is another crucial element of a trading plan.
Once the trade is on its way and in clear positive territory, the trader has more options to play around with regarding trade management:
- A trader could move their stop loss to the breakeven price level and thereby take risk off the table. Not every trader uses this tactic and both methods have equal value. A trader needs to test how moving the stop loss to break even influences the expected return, otherwise there might be a negative impact;
- A trader could use a trail stop in terms of pips, time, or a combination of pips and times. Personally I use a trailing stop that has time and pip movement built in it. Moving averages, the Ichimoku indicator, and the parabolic indicator are examples of dynamic indicators that use both time and pip size. Contrary to static tools, such as trend lines, the value of dynamic indicators is influenced by current price movement;
- Another option is for a trader could test how long it takes to reach their target on average. It is a study which I have never done, but there could be value in researching how long trades takes to reach the target on average, and whether or not the trade’s rate of success is influenced when it takes longer to reach that target;
- Gann angles are another option for exiting a trade.
Incorporating time factor into the trading plan will give the trader the well needed boost of confidence. The trader will be more patient and act with more discipline in the following moments:
a) During the non-trading hours;
b) Before entering the trade;
c) After entering the trade;
d) During the trade;
e) When exiting the trade.
Please let us know if this article has helped you! We would love to hear from you whether you have addressed these elements in your trading plan, and whether you will change your trading plan after reading this article?
Thanks for any feedback and for sharing this article with others!
Wish you Good Trading and a nice weekend!
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