Trading Tips

Want Trading Advice? Answer These Questions

If you’re a new trader asking me for advice about how you should move forward I’m almost invariably going to ask you two questions:

1)  Have you figured out what is the best timeframe for you to trade?

2) Have you picked the market that best suits you?

These two questions, to me, are the foundation for everything else. Granted, there’s a prior question everyone must ask themselves before they get started, which is “Should I trade?”, but for the sake of this discussion I’ll assume that’s been asked and reasonably answered.

Why are these the foundational questions?

Because they set up everything else.

Trading Timeframe
Your trading timeframe feeds into the choices you make regarding:

  • Market Traded
  • Instruments Traded (cash/spot, futures, options, etc.)
  • Trading Frequency
  • Market Analysis/Trade Selection Methodology
  • Risk Management Approach

The trading timeframe you choose should be the one you can operate in most consistently. Don’t pick a timeframe based on what you think you should do. This is how many unsuccessful day traders make their decision, for example. They think day trading is the path to the real money and try to shoehorn it into their school/work/life schedule when it just doesn’t fit. Most people are not suited to day trading because they don’t have the regular market hours available to them day in and day out. They would be better off with a longer timeframe focus.

When you know what timeframe you’re going to trade in you then have the basis for deciding on things like those listed above. Some markets may or may not work for your timeframe. For example, stock day trading is hard outside exchange hours, but forex trading goes on 24 hours. Some trading instruments may be better suited than others, like perhaps opting for ETFs to trade commodites rather than futures if you’re trading somewhat longer-term. Trade selection will have to be more technical as your timeframe becomes shorter. That’s just to name a few of the follow-on decisions.

Market to Trade Selection
Really, I could stop here with timeframe, but I think the market question is important too because it encourages you to give real thought to where you’re going with your trading. You want to pick a market that suits your timeframe, appeals to your interests, fits your financial situation, and offers you sufficient quality trading opportunties.

Don’t trade a given market because it’s the thing to do. A lot of people ill suited to forex trading, for example, were sucked into that market during the middle part of this decade because it was the hot market. Most of them got spit out because it wasn’t a best fit for them.

The market you decide to trade then becomes part of these trading choices, among others:

  • Instruments Traded
  • Market Analysis/Trade Selection Methodology
  • Risk Management Approach

Making Thoughtful Decisions = Being Focused
Obviously, there’s some overlap here and market also potentially comes out of the timeframe decision. The point is, though, that by going through this process you narrow things down so you can focus better. A major short-coming of new traders is that they lack focus and bounce around markets and timeframes and trading systems based on the last thing they read or saw which impressed them. If you take the time to think about your timeframe and then the market you trade, it will not only give you a solid foundation, it will help you in the process of making the next layer of decisions, like what specifically to trade and how to go about doing so.

By John

Author of The Essentials of Trading