Educational Article: The Importance of Time

Dear Readers,

Hope you are all well!

Once a week we will be focusing on educational material and things we can learn from the markets.  Today (Friday) is a good day for that: with a NFP around the corner we all should be more cautious… Please let us know in the comment section what element of trading you would like to know more about?

Today’s educational article

In this article I would like to focus on the importance of time and how essential it is to enhance your trading results… Incorporating this in your trading plan is a crucial factor in becoming a successful trader. As part of my trading plan I analyze and judge the statistical probability of the trade going my way, just by using time.

This article will focus on why time is important for our trading, while in the next educational article, part II, I will discuss how you can develop and incorporate time factor into your own trading plan.

Although experts and teachers do occasional mention the importance of having time in your trading plan, it is rarely an element they focus on. In most trading plans you will definitely see traders incorporate analysis, price movements and/or technical analysis, risk and money management into their trading plan, but I doubt whether time factor is just as common.

Many traders might even wonder why would time factor would be important in their trading? Why would time matter at all?

Before I give you my reasons for actively implementing time factor in my trading plan, let me ask you the following questions:

–          Do you have a time factor element in your trading?

–          If not, what are your reasons?

–          If yes, why and how?

–          Do you actually use it or is it a paper rule that never gets used?

The importance of time

Now let us dive into the importance of time in trading!

I believe time is important because of the following reasons:

1)      Time is money

2)      Time will affect a trader’s psychology

3)      The odds of a winning trade decrease if a trade takes too long to develop

4)      The chart is a time/price relationship

Let’s analyze all 4 points.

1)      Time is money

Let me explain. When purchasing products and services we calculate these items in a $ figure. Dollars spent can always be regained by Dollars earned via income opportunities in business or employment. However time spent can never be repurchased, so in that sense one could argue that time is actually more important than money.

Time is critical for everyone and every business, including trading. Here’s why:

Cash flow
All companies in the world aim for a high cash flow (receive money faster than you pay) and high sales turnover (fast cycle from goods purchased to inventory to goods sold). We should too. As long as our capital is tied up in an open trade, a part of our trading budget will be unavailable for new trading opportunities… The faster our trade is moved to break even, the more trading opportunities we can incorporate in our trading day. If our capital is free to use, we have more time to make a Rate of Return on our capital. Also, moving our trade to break even in an adequate and timely fashion decreases our risk exposure.

Delivery time
Furthermore, if our current open trades equal our maximum risk allowed, then our operations are in fact temporarily shut down. If we make a comparison with owning a retail store: the owner wants the goods shipped in/out and delivered in a timely fashion. We as traders should have the same expectations to our trades: a timely delivery of trade results (which should average a profit if your trading plan is correct). Just like stores do not want their transport to be stuck in traffic for too long, traders should not want their trade to be stuck in a sideways mess/chop for too long!


2)      Time will affect a trader’s psychology

A crucial element in all trading is psychology. The trader could have impeccable strategies, great risk and money management, and a well built trading plan but still fail due to lack of patience and discipline. A proper equilibrium of the psychology in relationship to their trading strategies and risk profile is essential!

Time is strongly connected to a trader’s state of mind, patience, discipline, and trading psychology in general. Why? Traders often get nervous when:

a)      They are not in a trade

b)      It takes too long for them to find & take a trade

c)       It takes too long for the trade to reach target

d)      It takes too long for the trade to be at Break Even

e)      They start viewing and analyzing the trade on a lower time frame than the time frame used for the entry

f)       They are analyzing/trading/starting at the charts for too long

g)      They hope that the trade will go their way if they give it enough space and time

Do you recognize yourself in any of these criteria? If so, I would love to hear from you in the comment section. If not, please share with us how you eliminated your fear and greed and managed to show discipline and patience in your trading career.

Incorporating time factor into the trader’s trading plan will allow the trader to be confident when to take the trade, but above all will give an indication how long they should stay in, when they should exit the trade, when to expect profits, and when to trade and not to trade.

3)      The odds of a winning trade decrease if a trade takes too long to develop

In my testing of time factor on the charts, I noticed a correlation between time and impulsive moves, which I later on translated to rules and implemented in my trading plan. The testing was done on the 15min, 1 hour and 4 hour charts, but I am quite confident that similar testing on lower and higher time frames would yield interesting (maybe similar) results as well.

The correlation I noticed was that price should continue impulsively in the direction of my trade within a few candle sticks, otherwise the likelihood of a substantial pause in time or a bigger correction in pips is high. Of course there are exceptions to the rule, but in most cases the rules works in my advantage.

Preferably I would like to see the trade move my way immediately. However, a pause of 1 to 2 candles after my entry is absolutely normal. If the 3rd or 4th candle does not pull my trade into clear positive territory, then I noticed the statistical chance of the trade materializing in a timely fashion is decreasing fast. Actually the probability increases that the currency will reverse for a small or bigger pullback and there is a good chance that my stop loss will be taken by the market.

This is when most traders experience the phenomena where there stop loss gets hit, after which they see the market reverse back into their direction without them. Or the trade barely survives but after hours and hours of waiting, the trader takes off the trade, only then to see the currency finally move impulsively in the right direction. All of us know this feeling and it sucks. Please share an experience like that in the comment box if you remember this happening to you.

I must warn you that the testing I have done in this field is connected to the strategies (Break Out and Fib) I use. All traders must do their own testing on their favorite currency/cies, time frames, and strategies. I will provide a guideline of how you can develop and incorporate time into your own trading plan in the next educational article, so stayed tuned in for that.

Basically, giving a trade space in terms of pips and time is surely a good idea, but knowing when to give space and when not to give space is a vital distinction. Furthermore, I would bet that most traders have a distinct guideline for the pip size, but not for time.

4)      The chart is a time versus price/pips relationship

The charts we look at are 2 dimensional: we see both price and time plotted on our screens. However, if you scan the internet, you would almost believe that there is only 1 dimension: price. Price seems to be the only thing that matters. I see tons of material, articles, webinars, and videos talking about price, price action, indicators, technical analysis, trade setups, yet only occasional do I see attention geared towards time. For you to truly master the art of trading, you must devote time in analyzing time factor.

Besides having importance in charts, you see the same time/price relationship in your evaluation as well. The simple fact of life is: trading is not only a battle of earning pips. It is a question of many pips you earn per week/month/year/decade.

To summarize:

In a highly leveraged market such as Forex, timing is vital. Without proper timing, your well intended and great analysis & trades could leave you penny less.

Entering at the right price is half the story. Entering at the right time is just as important.

Having clear cut rules in your trading plan regarding time will give you an important edge, a winner’s edge.

In our next week’s article I will give you my best advice on how you can add time element in your trading plan. The article will discuss step by step how time can be an integral part of your trading.

Add us to Twitter – @WinnersEdgeTra – if you do not want to miss that article.

I wish you good trading and a good weekend!

Chris Svorcik

P.s. for those of you how have read Thursday’s article.
The AUDUSD indeed came crashing downwards. Unfortunately for me, it did so without hitting my take profit level and missing it by 15 pips. End result: break even.
The GBPNZD made a larger correction and took out the other parts of the trade left open for 0. End result in total: winning trade.

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