There is one question that I am asked continuously about investing. It doesn’t matter if it is a rank amateur asking or someone with quite a bit of knowledge about the financial markets. The question is what one word differentiates successful investors from the masses who lose money or simply barely break even when plunging into the markets?
I was a little taken back when I first heard this question. I immediately thought that the markets are far too complex to distill down into one simple word.
Then it hit me like a ton of bricks. There is a single, very powerful word that is truly the key to mastery in the financial markets. This word is not a financial or Wall Street word, it’s not even something from academia. In fact, this one word can be applied to all of life and not just the financial markets. It is truly the key to success in most everything, particularly the stock market.
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The word is Flexibility.
The ability to stay flexible is truly the key to investing success. What I have witnessed time and time again is that investors that are stuck in a rut of only doing things one way have the hardest time winning. Being able to morph your tactics and methods to the market or even stock that you are trading is truly the key to long term success. The markets are not a one size fits all proposition. They are constantly changing and only those investors who are flexible can survive and thrive over the long term.
Nowhere is the ability to change more crucial than in investing timeframes. Winning investors can easily change from time frame to time frame in their pursuit of profit. At the same time, struggling investors are often stuck in the rut of only thinking in one time frame.
Flexibility in time frames is truly the key to successful trading. Being able to judge a market or stock based on its volatility and applying your goals is the best way to choose the correct time frame to trade.
The next question often asked is just what the investing time frames are and what are the best tactics for each time frame?
The stock market provides investors incredible flexibility in terms of trading time frames.
The market can be scalped on a micro fraction of second’s level or held long term over months.
Each time frame provides both benefits and challenges to the trader.
This article will drill into each of the primary time frames as expressed on charts, drill down into details of each and provide a simple trading strategy you can implement right now on the particular time frame.
The 3 basic time frames for financial trading are short term, medium term and long term.
I consider short term to be any trade opened and closed the same day. This trading is commonly referred to as day trading.
Medium term is holding a position for up to a week or 5 trading days. Professional investors call this time frame, swing trading.
The final and most popular time frame is long term investing. I consider long term anything over a week.
Remember, the exact definition of these terms can be flexible. The above definitions are certainly not cast in stone. Every investor has their own definitions of the terms. This is particularly true in the medium swing trading time frame. My definitions are for example only.
Short term is the domain of the scalper and day trader. Scalping takes place in the shortest of the short time frames. Scalpers often place trades shooting for only a few cents profits. It is a fast and furious style with traders often making 100’s of trades a day. Scalpers use Tick Charts and/or are simply tape readers with the Depth of Market screen.
Scalpers monitor very quick changes in supply/demand dynamic by watching the bids and offers on the DOM screen.
A successful strategy is to follow the volume, for example, relatively larger volume comes in on the bid, the scalper will jump on the board hoping to ride the resulting momentum for a tick or two then jump back out.
In fact, the most successful trading method every devised is called HFT or high frequency trading. HFT used computer programs and co-located servers close to the exchange to make thousands of trades per minute. This enables these sophisticated traders to capture tiny inefficiencies in price for profits.
Medium term trading which I define as any time under 5 days or a week. Generally known as swing traders, these investors normally utilize chart patterns, intraday trends, and news trading to make decisions.
Technical tools like moving averages, Bollinger Bands, and stochastic are the primary tools of the medium term swing trader.
One very successful strategy is to wait for price to hit either the upper or lower Bollinger Band then fade the move. For example, if a price bar hits the upper band, it would trigger shorts, hitting the lower band triggers longs.
The theory being that the move is over extended when it breaks away 2 standard deviations from the average (upper or lower bands illustrate this) and will reverse quickly.
Long term trading is the arena where the true investor plays.
I consider long term anything over 5 days. It can be up to years if you trade like Warren Buffett.
You can definitely notice the longer term trending behavior.
Trend trading is the primary strategy for the long term investor.
The way it’s done successfully is to observe a daily chart for several months, ascertains trend direction using a Simple Moving Average. I like using the 200 day simple moving average since it is the one used the most by large funds and other professional investors. However, depending on your overall time frame, 20 or 50 day simple moving averages can be utilized.
For example, let’s assume the long term trend is bullish (up). I then take a daily chart waiting for a 3 day pull back to occur, on the fourth day, I will enter long in anticipation of the longer term trend continuing. This is how the real money is made trading by the average trader and sometimes by the large trend following funds. You can also break out trade new highs depending on your trading philosophy. Some traders like buying weakness in the midst of the longer term upward trend. While other traders will only buy strength by going long on new highs or break out patterns. There really isn’t a right or wrong way, it depends on the stock and its historical patterns.
If you can catch a trend on a pullback or on a new high, and have the nerve to ride it with mounting profits and weather the inevitable draw downs, long term trend trading works!
The key takeaway here is to learn how to trade all 3 of the major time frames. Each stock or financial instrument is different and can best be traded in one of the 3 time frames. Having the flexibility to change time frames to capture profits is a true secret of consistently successful investors.