Trading Education: Episode 02

Time frames

Something I noticed is, that there is a lot of confusion about the time frames, be it people looking at too low time frames at the charts to make decisions or people using strategies that are not adequate in the relevance to their style of trading.

This topic may be highly subjective, I am sure that there are people going contrary to my technique and the ideas I want to bring close to you. However, you can take this post — as most of my posts — as orientation, to find your own way and style of handling things.

Short-, mid- and long-term, what are we talking about here?

Ask 100 active traders in crypto what short, mid and long term trades are and you will get 90 different answers on their investment horizons. Lets look at the definition of these terms in the relevance to finance and investment:

In finance or financial operations of borrowing and investing, what is considered long-term is usually above 3 years, with medium-term usually between 1 and 3 years and short-term usually under 1 year. It is also used in some countries to indicate a fixed term investment such as a term deposit.

This leaves us with a few numbers for the beginning, but something we need to realize is — every asset class has a different time frame. If we take a look into bonds, we will find most people considering up to 10 years medium term and over 10 years long term.

If we look into tax laws (while these also set different standards to it from nation to nation), capital gains tax on stocks for short term trades is anything below 1 year, while long-term is mostly considered over 1 year, ignoring the mid-term scale.

Every definition I found on the topic was insufficient for me and the art of trading I apply — even more so for the market movements. Generally, I started to anticipate less than 1 month hold time as short term, up to 6 months as mid-term and everything above as long term. For me, these investment horizons made the most sense and felt most natural in the fast-paced markets of cryptocurrencies.

Why would the investment horizon be important?

Setting the investment horizons is an important factor in the personal risk- and bankroll management and should be one of the first steps to be taken for consideration when you start to operate your crypto-portfolio. Obviously long-term trades will bind your capital for quite a while in the asset and the long time frame yields the risks of unforeseen events taking place — which especially in the cryptomarket have fast and dire consequences. Hence the sum you want to invest has to be adjusted for the risk and leave you enough capital to take on other possible investments. While the long term investments yield the most risk, they also yield the biggest reward if they take off.

The topic risk- and bankroll management is an extensive topic though, which I will cover at another time in more detail.

So short-term it is yes?

No, well, and yes. The ideal portfolio consists of short-, mid-, and long-term positions. Let me illustrate this on the example of Stellar (XLM / STR)

Kraken XLM chart. Red line — 30 day, Yellow line — 180 day, Green line — 365 day

This is the weekly Stellar chart, yes, weekly. You will find many people that will argue that the weekly frame is meaningless, as the markets are too fast paced. For me personally the weekly chart is one of the most important time frames there is.

After a strong downtrend we can find an accumulation zone for us in the white rectangle. (I will explain the technicalities on why and how at some point later when we dwell deeper into technical analysis.) For illustration I added my personal hold regions, the people that accumulated during the period for a short-term trade caught the IBM — Stellar announcement and could strike a nice short-term profit. The people anticipating this trade in a longer fashion, could multiply their profits compared to that. While many traders jump in and out of their assets and hence limit their potential to profit from it, the patient players not only have a more relaxed time being, but also strike the higher profits.

How this ultimately will play out? Who knows. The people in it for the long-term time frame could increase their profits even more — or lose it all if they get caught in another massive downtrend while they apply no risk management (but that’s another topic).

I hold it with Benjamin Grahams in that regard:

“In the short run, the market is a voting machine but in the long run, it is a weighing machine.”

Short term you win the popularity contest, but only the solid projects will survive and thrive in the long terms.

But what about the charting frames?

The chart time-frames are, just as the whole topic itself, highly subjective. Most experienced traders use the 4-hour charts to check on the intra-day developments. A general rule of thumb is though: The higher the time frame, the more valid the signal the chart gives it.

Many novice traders will resort to shorter time frames though, as they have the initial belief that they can react faster to the market if they see the developments every minute — which couldn’t be further from the truth.

Exposing yourself to constant chart watching and getting nervous on every move the chart makes down on the lower frames, should be a big red flag for you. A sign that you need to reevaluate your strategy and find the triggers that make you handle the situation that way. You may want to go an episode back and read the last article in the series I wrote.

To give a bit of a guideline let me outline my way of checking the chart frames. I go once a week through the weekly charts of markets I am interested in (which are basically all altcoin-markets on bigger exchanges). If a weekly frame is not yet there to view I take the 3-day, then 1-day, 12-hour and so on — the biggest available frame it is up to the weekly. When I found something interesting I take it into my watch-list and put a closer look on it and do some TA magic on the daily and 4-hour frames. From there on I estimate my further actions. Not once I will go down in the hourly chart or even less.

Conclusion

As I mentioned choosing a time frame of investing really has to fit your character and preferences. For me personally the bigger frames have been a blessing after losing a lot of money to the illusion that I could try to be a day trader. I often realized that while I sit back comfortable on my positions (which I had acquired during weeks of bear markets), that others were desperately chasing rising altcoin after rising altcoin, now that they increased in value again. These people were jumping from position to position, stressing themselves out and missing out on higher gains, while all they had to do is prepare their positions better and be patient. That would have allowed them to participate in the market with a relaxed mind, a comfortable position and enough spare time to not care about the charts at all.

Despite all that I said, I am sure that there are sufficient traders, that live well with the short-term trading lifestyle and strike great profits, maybe more than I ever did — However, I think for the traders that have not found their orientation in this regard yet or do not feel well with the way they handle things, this article can be a good first step to think about the topic and change this.

Drilling for the Oil of the 21st Century.