In yesterday’s post I started to answer an inquiry which came in from a prospective equity index futures trader over the weekend. Because it covered a few different topics, I elected to split it up into parts to address more specifically. Here’s the second part.
Then there’s the choice of timeframe. Is it possible to have a very long term view of things and concentrate only on the monthly charts? That means following a major trend probably for several years. Is it workable, or would I be better off going for the weekly charts? I know about drawdowns and it’s ok with me.
It is aboslutely possible to trade the long-term using monthly charts. I have done it myself on occassion. The problem, of course, is that you can wait a long, long time for the right situation to develop. At the monthly chart timeframe you’re probably talking about making one or fewer trades per year – and sometimes none at all for a long period.
Personally, I tend to make weekly charts the longest ones I will actually trade from. They provide many more opportunities and the moves they catch tend to be very meaningful. It also makes it easier to get in on the big trends relatively early. A market can move a huge amount in a month. Also, weekly timeframe price moves often fit better in with the expiration cycles of futures contracts, where you have to deal with rolling forward if you plan on holding a position beyond contract expiration.
That said, however, I often look to the monthly chart for a few on the longer-term underlying trend. It helps me frame the potential for a weekly timeframe trade.
Clearly, if you’re playing in the longer-term you have to account for the in-trade volatility – the stuff that produces open equity drawdowns. This is an especially important consideration for futures traders where the leverage amplifies things. That means capitalization is hugely important.
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
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