Posted this article in the Technical Trader forum. Thought it might be useful to few. I do not use SB frims.Just noticed some of you might not be familiar with MACCI indicator. MACCI is a 3 period SMA of the CCI which is then put through an exp MA with smoothing 0.4. I.e Auro regressed @ 40%. Real tick users have this indicator as default. Is the best TA indicator I have come across. It is rather predictive.
We often discuss trading issues in our chat room which is vital to trading. By trading I do not mean day trading only. One of the problems that many traders are facing is the idea of best time frame to trade. They often want to know why 3 minutes chart and not 5 minutes.
Well I do not blame you to want to know as your exit /entry depend on these settings.
The answer is simple. Please do the following test .
Lets say you are an index player/ Lets say DOW is your instrument. Lets say your spread is 5 points each way (10 to buy and sell) and also lets assume you are betting £1/trade.
Also for simplicity of this example we decide to go long.
Step 1:- chart DOW in four time frames 1,3,10,30
Step 2:- wait for 1,3 minutes gets Oversold i.e MACCI around -100.
Step 3:- Open a position
Step 4:- close the trade when 3 minutes gets Over bought
How many points did this exercise give you? ( for MACCI of 1,3 minutes go from OB to OS) Lets say it was a consolidation period and you only got 13 points out of it. ( or less). Now we have 13 points but we have to give back 10 to the Spread betting company). This leaves you with 3 points.
Now lets look at this trade. We are entering in a bet where if you win market pays you £3 but if you lose you pay market £10. ( I am assuming I have called the exact bottom as well. If it goes against me I have to pay £10+ my stop loss. This makes this trade even less fair.) So we are operating at 3: 10 ratio here. LETS CALL THIS RATIO, THE TRADE BALANCE. ( toss up is 50:50 and you get 10 points if you win and give 10 points if you lose. Much safer bet)
So where is the problem and how can we eradicate it?
Simple guys:-
1) Find a cheaper SB company which does not charge you 10 points spread. Which in turns mean to change the instrument you are trading. Futures or US stocks I recommend)
2) Increase your time span from 3 minutes to say 5 minutes to see if that makes any difference to your TRADE BALANCE. If it did not make much difference then go to higher time frame.
Now you can see where these settings are coming from. Your settings depend on your TRADE BALANCE. If a 3 minutes settings gives you less than 1:1 trade balance, this means your chances of winning is less than a coin toss up.
I trade US stocks with tiny spread and hence 1,3 settings are fine and I often make a winning trade. ( unless my analysis is wrong). If I tried to trade DOW in consolidation with these settings with 10 points spread I sure would be out of pocket nearly all the times. YES NEARLY ALL THE TIMES. ( unless if on the day DOW is rather volatile and DOW moves say 30 points in 3 minutes)
Some of you like our very own Ragic uses 15,30 minutes to trade UK stocks. and not 1,3. This makes sense as some UK stocks do not even move a penny in these small time frames.
THIS POST IS MEANT FOR OUR NEW MEMBERS AND NOT THOSE MORE EXPERIENCED TRADERS WHO HAVE BEEN WITH THE TECHNICAL TRADER FOR A WHILE.
IRAJ
We often discuss trading issues in our chat room which is vital to trading. By trading I do not mean day trading only. One of the problems that many traders are facing is the idea of best time frame to trade. They often want to know why 3 minutes chart and not 5 minutes.
Well I do not blame you to want to know as your exit /entry depend on these settings.
The answer is simple. Please do the following test .
Lets say you are an index player/ Lets say DOW is your instrument. Lets say your spread is 5 points each way (10 to buy and sell) and also lets assume you are betting £1/trade.
Also for simplicity of this example we decide to go long.
Step 1:- chart DOW in four time frames 1,3,10,30
Step 2:- wait for 1,3 minutes gets Oversold i.e MACCI around -100.
Step 3:- Open a position
Step 4:- close the trade when 3 minutes gets Over bought
How many points did this exercise give you? ( for MACCI of 1,3 minutes go from OB to OS) Lets say it was a consolidation period and you only got 13 points out of it. ( or less). Now we have 13 points but we have to give back 10 to the Spread betting company). This leaves you with 3 points.
Now lets look at this trade. We are entering in a bet where if you win market pays you £3 but if you lose you pay market £10. ( I am assuming I have called the exact bottom as well. If it goes against me I have to pay £10+ my stop loss. This makes this trade even less fair.) So we are operating at 3: 10 ratio here. LETS CALL THIS RATIO, THE TRADE BALANCE. ( toss up is 50:50 and you get 10 points if you win and give 10 points if you lose. Much safer bet)
So where is the problem and how can we eradicate it?
Simple guys:-
1) Find a cheaper SB company which does not charge you 10 points spread. Which in turns mean to change the instrument you are trading. Futures or US stocks I recommend)
2) Increase your time span from 3 minutes to say 5 minutes to see if that makes any difference to your TRADE BALANCE. If it did not make much difference then go to higher time frame.
Now you can see where these settings are coming from. Your settings depend on your TRADE BALANCE. If a 3 minutes settings gives you less than 1:1 trade balance, this means your chances of winning is less than a coin toss up.
I trade US stocks with tiny spread and hence 1,3 settings are fine and I often make a winning trade. ( unless my analysis is wrong). If I tried to trade DOW in consolidation with these settings with 10 points spread I sure would be out of pocket nearly all the times. YES NEARLY ALL THE TIMES. ( unless if on the day DOW is rather volatile and DOW moves say 30 points in 3 minutes)
Some of you like our very own Ragic uses 15,30 minutes to trade UK stocks. and not 1,3. This makes sense as some UK stocks do not even move a penny in these small time frames.
THIS POST IS MEANT FOR OUR NEW MEMBERS AND NOT THOSE MORE EXPERIENCED TRADERS WHO HAVE BEEN WITH THE TECHNICAL TRADER FOR A WHILE.
IRAJ
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