How to trade the 5 minute time frame.....
There are no hard and fast rules that apply to trading on this time scale as opposed to trading on a larger time frame. For instance, some investors will use certain technical indicators that work well for them, and others will use other tools that work equally well. Needless to say, the age old rule of money management is an all important factor here as it is anywhere else.
Decent real time charting software will be needed in order to trade on this time frame. As we trade mostly US stocks, we are comfortable using TCNet, the big brother of TC2000. It costs $99 per month which is actually cheaper than most real time charting packages. You can use Metastock which is superb but will cost you much more for the privilege.
If you decide to use an independent charting package, then your data feed is another cost that will have to be accounted for.
INDICATORS
Firstly, indicators that you may have set on a daily chart may not be suitable for when trading a shorter time frame. For instance, when using time segmented volume, I prefer to use a 67 period on the shorter scale, but an 18 and 28 period on the daily chart. The same is true for a stochastics indicator I use with a higher value applied to the 5 minute time frame and a lower value used for the daily scale.
You will need to play around with your indicators to see what suits the 5 minute timescale and is best for you. Essentially, when you are trading the 5 minute time frame, you would use indicators in the same way that you would use on a daily chart. You should always be mindful of the larger timeframes and regularly switch to a 10 minute, half hour, hourly and daily chart to ensure you are aware of the larger movements in progress.
For instance, you could be using indicators such as TSV, moneystream and stochastics on the 5 minute chart that are indicating a down move but the hourly chart may be suggesting something entirely different. If there is a conflict (and there often is), then it may be better to wait for a better set up to occur in another stock.
I still use moving averages over the short term and am constantly mindful of a stocks movement between the 20, 50 and 200 period moving averages. These averages act like magnets to a stock either attracting or repelling during the day. I particularly like set ups when a stock has moved below a moving average, then moved back up and tested the underside of that average twice before finally failing. If, after the second attempt to get back above the average, the stock fails, that will often give a nice short term move to the downside. The opposite is true when you reverse this situation.
Fibonacci retracements can be of vital importance when trading. I start by placing them on a daily chart I also use them intra-day and will measure any short term highs and lows. If a stock is on a down move after making an intra-day high, I will place fib levels onto the chart to see where the retracement may end, thus giving a good entry level for an upside move.
A personal favourite of mine is to trade intraday gaps. I have often traded the QQQ which frequently gaps at the open only to get filled during the session. After it gaps, I watch to see if the stock looks like turning to fill it and I can often make a nice trade just out of that relatively small move.
MANAGING THE TRADE
I’m making an assumption here that most readers are spread betting considering the tax advantages and relatively low costs of entry. You would still need to work out what type of stocks you can trade, depending on how much you have in your account. Be mindful of the golden rule that you should never have any more than 1% of your entire account at risk in any one trade. That means you need to position your stop/loss in an appropriate area that does not exceed this limit.
So as soon as you open a trade, you need to place a stop/loss. This will vary dependent on the trade. For instance, on one trade, you may be able to draw a trend line beneath a series of higher lows and use that as your stop. In others, you may have witnessed a key reversal pattern on a candlestick and so use the lowest price on that candle as your stop.
Assuming your trade starts going in the right direction, you can keep raising your stop until you are at breakeven point. At this point you can literally walk away from your screen and let the trade do what it is going to do. If you stay watching the screen, you could end up closing the position early when it was unnecessary to do so. By leaving it for an hour or more, you may end up taking larger profits. Of course there will always be the occasion when you have been stopped out, but at least you haven’t lost anything that way!
CONCLUSIONS
Trading on this time scale is not going to be of interest for all our readers, but it may be for any traders out there. As always, managing the trade with stop/losses and allocation of funds are some of the most important aspects. You can lose 60% of the time and still make money by applying strict money management rules.
Regards
Darren Winters
Decent real time charting software will be needed in order to trade on this time frame. As we trade mostly US stocks, we are comfortable using TCNet, the big brother of TC2000. It costs $99 per month which is actually cheaper than most real time charting packages. You can use Metastock which is superb but will cost you much more for the privilege.
If you decide to use an independent charting package, then your data feed is another cost that will have to be accounted for.
INDICATORS
Firstly, indicators that you may have set on a daily chart may not be suitable for when trading a shorter time frame. For instance, when using time segmented volume, I prefer to use a 67 period on the shorter scale, but an 18 and 28 period on the daily chart. The same is true for a stochastics indicator I use with a higher value applied to the 5 minute time frame and a lower value used for the daily scale.
You will need to play around with your indicators to see what suits the 5 minute timescale and is best for you. Essentially, when you are trading the 5 minute time frame, you would use indicators in the same way that you would use on a daily chart. You should always be mindful of the larger timeframes and regularly switch to a 10 minute, half hour, hourly and daily chart to ensure you are aware of the larger movements in progress.
For instance, you could be using indicators such as TSV, moneystream and stochastics on the 5 minute chart that are indicating a down move but the hourly chart may be suggesting something entirely different. If there is a conflict (and there often is), then it may be better to wait for a better set up to occur in another stock.
I still use moving averages over the short term and am constantly mindful of a stocks movement between the 20, 50 and 200 period moving averages. These averages act like magnets to a stock either attracting or repelling during the day. I particularly like set ups when a stock has moved below a moving average, then moved back up and tested the underside of that average twice before finally failing. If, after the second attempt to get back above the average, the stock fails, that will often give a nice short term move to the downside. The opposite is true when you reverse this situation.
Fibonacci retracements can be of vital importance when trading. I start by placing them on a daily chart I also use them intra-day and will measure any short term highs and lows. If a stock is on a down move after making an intra-day high, I will place fib levels onto the chart to see where the retracement may end, thus giving a good entry level for an upside move.
A personal favourite of mine is to trade intraday gaps. I have often traded the QQQ which frequently gaps at the open only to get filled during the session. After it gaps, I watch to see if the stock looks like turning to fill it and I can often make a nice trade just out of that relatively small move.
MANAGING THE TRADE
I’m making an assumption here that most readers are spread betting considering the tax advantages and relatively low costs of entry. You would still need to work out what type of stocks you can trade, depending on how much you have in your account. Be mindful of the golden rule that you should never have any more than 1% of your entire account at risk in any one trade. That means you need to position your stop/loss in an appropriate area that does not exceed this limit.
So as soon as you open a trade, you need to place a stop/loss. This will vary dependent on the trade. For instance, on one trade, you may be able to draw a trend line beneath a series of higher lows and use that as your stop. In others, you may have witnessed a key reversal pattern on a candlestick and so use the lowest price on that candle as your stop.
Assuming your trade starts going in the right direction, you can keep raising your stop until you are at breakeven point. At this point you can literally walk away from your screen and let the trade do what it is going to do. If you stay watching the screen, you could end up closing the position early when it was unnecessary to do so. By leaving it for an hour or more, you may end up taking larger profits. Of course there will always be the occasion when you have been stopped out, but at least you haven’t lost anything that way!
CONCLUSIONS
Trading on this time scale is not going to be of interest for all our readers, but it may be for any traders out there. As always, managing the trade with stop/losses and allocation of funds are some of the most important aspects. You can lose 60% of the time and still make money by applying strict money management rules.
Regards
Darren Winters
posted by Darren Winters at 11:49 AM
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