I first started intraday trading 20 years ago. It turns out, intraday traders attract a lot of attention. And there was a sharp increase in the number of non-traders who would ask me about the market.
“What’s your take on the S&P?”
“Where do you think the Dow is going?”
“Is copper headed up?”
Questions like those reminded me that most people had no idea what being a trader is all about. It’s good they were asking, but they missed the mark on how trading works. To spare the curious people and me, I started answering a question with a question.
“How long do you have?” and “What’s your timeframe?” were my trusted standby answers.
And that led to blank stares and silence that often killed the conversation. Other times their responses led towards more meaningful discussions about trading. (Always my favorites!)
From those discussions, I have refined four key considerations for intraday trading. They offer a solid foundation and they will help you on your path to success.
Intraday Trading – Consideration #1: The importance of interval
Deciding which intraday timeframe interval you will trade is important. There are countless intervals to choose from:
- 5 minute
- 10 minute
- …and the list goes on.
Traders serve themselves well by defining the scope of their market operations. Trading more than one interval can create too much complexity. Beginners and the uninitiated do best by sticking to one time frame for both entry and exit of their trades.
Choose one interval, and start there. You can add more intervals to your trading plan once you have mastered trading in a single one.
Intraday Trading – Consideration #2: Higher timeframes for happiness and profits?
Higher timeframe intervals can be a huge advantage in intraday trading. Two benefits top the list of why it is best to err on the side of longer intervals.
These benefits are:
- The reduced impact of commissions.
- Larger dollar profit and loss figures.
Let’s look at an example:
Consider a sample of 100 trade results. A $9 per buy and $9 per sell commission schedule would result in a $18 overhead on every trade. Traders have to pay regardless of the trade being a winner or a loser. That means a total commission of $1,800 for the 100 trades. We can distribute the 100 trade results to 50 winners and 50 losers. The winners are twice as large as the losers. The trade size is constant.
And the results…
On the shorter time interval trading chart, the average winning trade is $100. Over the 50 winning trades that equals $5,000. The average losing trade is $50 (half of $100) for a total of $2,500 in losses. Adding it all up results in a gross profit of $2,500. Subtract $1,800 in commissions and net profits equal $700.
Result: Commissions have reduced profits by 72%.
On the longer time interval trading chart, the average winning trade is $500. Over the 50 winning trades that equals $25,000. The average losing trade is $250 (half of $500) for a total of $12,500 in losses. Adding up the results gives a gross profit of $12,500. Subtract $1,800 in commissions and net profits equal $10,700.
Result: In this case, commissions have reduced profits by 14.4%.
Given a choice, most traders would opt for reducing their total profits by 14.4% rather than losing 72%. It makes sense to use the longer time interval chart. Price simply has more time to travel given a longer period of time.
“Up your timeframe to up your profits.”
It is vital to remember that both of these examples use the same strategy. They both use the same account size, and the same number of shares traded. All that changed is the chart interval.
Make sure you understand these benefits. Consider using a longer time interval chart to improve your trading.
Intraday Trading – Consideration #3: Checklist champions
Checklists are the tools of champions. Engineers, doctors and even Santa have checklists. And you better believe they’re checking them twice.
Successful traders use checklists too. It’s the only way to ensure that the proper conditions are being met to take each trade. There is no chance of keeping everything that needs to happen in your head without a way to organize it.
We can use a revealing example to drive this point home. Let’s take four hypothetical conditions on a trading checklist. They all need to happen before placing a long entry.
The four conditions are:
- Price has to be above the 200-period moving average.
- The market must have made a new high more recently than a new low of day.
- Price has to be within the upper half of the day’s trading range.
- There must be a reversal – defined as being a break of the high of the previous bar if 2 or more previous bars display lower highs.
Those rules are not that hard to follow. But, without each one written down in front of you as a checklist the task would be way more challenging. Don’t make your trading more challenging that it needs to be. Use checklists to your benefit.
Intraday Trading – Consideration #4: Multi timeframe confluence as a guiding light
In Consideration #1, we covered how traders benefit by sticking to a single timeframe. One timeframe to enter and exit trades. Yet, there are also situations where too much of a laser-like focus can end up blinding you to the bigger picture.
Imagine a trader who takes both long and short trades. Both entry and exit trigger in the 10-minute chart interval. A closer investigation shows the short trades often only take small losses. At other times they are breaking even. These undesirable trades have occurred over the past few trading sessions.
“Multiple timeframe confluence is your guiding light in the markets.”
Taking a step back to the hourly and even daily chart reveals that the stock is in a powerful uptrend. When the strategy’s short sale conditions trigger, a trade initiates. Unfortunately, those trades do not last very long.
In similar cases, it can be a benefit to optimize trades. Optimization happens through the filter of multi-timeframe confluence. Set up a process where trend verification in the 60-minute or daily chart is an extra condition. Then take the trade in a lower timeframe to improve results.
Trading strategies boil down to a set of rules. Multi-timeframe confluence is one of the many rules you can choose to help you trade. Use multi-timeframe confluence to identify the preferable opportunities. Those are the trades that have the best chance of going further before closing out. It will improve your trading performance.
For more day trading techniques, tools & strategies, check out these articles:
- 5 Truths To Understand When Trading For A Living
- 8 Essential Tips For Day Trading Options
- 4 Ways To Size Day Trading Accounts
Try using higher time frames, checklists and multi-timeframe confluence. It will improve your intraday trading.
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