One of the most crucial realizations I had over the years is that profitable trading opportunities appear in many different timeframes. For instance, you may find that a certain stock consistently bounces or retraces when it hits its 50day moving average and that this trade usually lasts two days for best profitability. At the same time you might find that this same stock usually offers good value when its price/earnings ratio drops below a certain level (all other things remaining equal) and that investment lasts best for several months. These opportunities are not mutually exclusive; they can occur at the same time. In this example, if you closely follow your stock you could take advantage of both opportunities simultaneously as long as you realize that each setup has a distinctly different timeframe. Hence, to take advantage of multiple time horizons one needs multiple strategies.
Here are a few of the vast benefits of diversifying trades and investments across multiple timeframes:
- Increased consistency of profits
- Decreased correlation of the portfolio vs. the market
- Significantly better perspective of the market’s current standpoint and opportunities
- Act from a more neutral standpoint and trade without stress
- Find more trades with the most favorable risk/reward ratio
One of the most common mistakes that traders make is not sticking to their rules, i.e. not taking profits or stop losses when initially determined. Dividing trades into different timeframes makes it easier to stick to the rules. There are various reasons for this but often traders feel that it’s easier taking off a trade knowing they still have other trades open in different timeframes.
Today’s dynamic markets demand flexibility in trading timeframes and adaptability of trading ‘systems.’ My approach of trading in multiple timeframes tries to capture opportunities in three specific time horizons (the three buckets). The objective is to thereby reach more consistent profits.
Here is how the buckets are split-up:
1) (Bucket 1) Time Horizon – 1 day or less: A few select intraday setups in the E-Mini S&P500 Index futures contract and individual stocks.
2) (Bucket 2) Time Horizon – 2 days to 3 weeks: ‘Swing trades’ on various mid and large cap stocks and ETFs, often via the options market…but can also be done using stocks
3) (Bucket 3) Time Horizon – 3 weeks to 6 months: 1) A bucket of long stocks and net short options trades on various mid and large cap stocks and ETFs to take advantage of time-decay/high options volatility – often using option credit spreads
The above is the approach to trading and investing that I use at my firm to manage money and guide clients through the trading days. While there are certainly valid arguments for only trading in one time-frame (day trading, swing trading, longer-term investing etc.), I have found that the multi-timeframe approach helps me have more consistently profitable portfolios.
For more details on this strategy or other strategies I use, please visit WWW.THESTEADYTRADER.COM
Have a great trading day