The Perfect Time Frame for the Retail Trader

by Boris Schlossberg Boris Schlossberg

I’ve been running a variety of my algos, both for the BK chat room and for my own account and the longer I trade the variations the more it becomes evident that the one hour chart is the perfect frame for the retail trader.

There are two principal reasons for this. The one hour is responsive the daily swing flows of the market while at the same time long enough to avoid the random ebb and flow of intraday prices. As retail traders, we simply can’t compete on the sub pip level of market makers and HFT algos. It’s akin to driving the Autobahn in a Chevy Cruze. No matter how hard you try you will never be able to drive against the BMWs, the Audis, the Mercedes’ and the Porsches.

It is fun to try, however, which is why we all gravitate to the 1-minute or the 5-minute chart. But the spread, the commission, the market volatility create an almost impossible execution environment and that’s why we should allocate most of our capital to the longer time frames (say in a 70/30 split) in order to truly optimize the chance of success.

The 1-hour chart is no panacea and certainly won’t guarantee success and is not even immune from news bombs which could flip sentiment in an instant and wipe out perfectly good trades. Still, it is slow enough to catch most of the more meaningful market signals and it allows for larger stops and limits which by their very essence protect you from the randomness of the lower level charts.

Yet even on lower level charts, the algos have taught me that less is more.

There is nothing quite like attaching a new EA on 12 or more pairs and seeing it trigger a multitude of trades on 1 minute and 5 minutes charts. It’s exciting! It’s fun! It’s action packed! But very soon you see one, two, three trades go sour all once and then it’s no longer enjoyable. The profits of the past few hours begin to melt away and then quickly turn to losses and then to truly bad losses, especially if you are trading your regular size. Very quickly you realize that you can’t trade a lot and win. You are not a market maker with infinite capital, split-second execution and access to near choice spreads. You are price taker like it or not and that means you need to choose carefully.

That’s actually one of the great advantages of trading retail. Unlike market makers and HFT algos, you are not compelled to trade. You can step away anytime you want -- that’s a huge edge that most retail traders overlook because they just want to be in a game. But an algo, even a very good one quickly shows you the folly of your ways.

On my 1-minute chart, I’ve winnowed myself down to just three pairs and 5 most liquid hours of market trade. That means I may only do 2-4 trades per day. And that’s enough. In fact ideal. The more you trade, the more you lose -- it’s the everlasting truth of the markets but algos help you discover it, mighty quickly.

Let Plato Design The Perfect Trading System for You

by Boris Schlossberg Boris Schlossberg

Plato’s cave is one of the greatest philosophical fictions ever invented. The idea that we don’t truly see the real world but only the mere shadows of things, that our perception of reality is limited by our own flawed senses is such a powerful concept that it remains a topic of debate and discussion 2500 years later, just as Plato’s work, the Republic continues to be the foundation of the Western intellectual canon.

In writing about Plato, Robephiles notes that “Plato was distrustful of the senses when it came to the ability to perceive knowledge. Plato knew that our senses could be fooled and he placed an emphasis on our abilities to think and reason rather than the knowledge gained from the study of the physical world.

This leads us to another famous metaphysical idea, The Theory of the Forms. Plato was fascinated by the problems of universals. An example would be as if I told you I had a dog. If I told you this you might picture a poodle or you might picture a mastiff or a chow or a border collie. These are all dogs yet each one is so different in its particulars. What makes a dog have its essential ‘dogness’? “

In an age of data science, Monte Carlo simulations and million backtests per second, the empirical model -- so successful in the physical sciences -- now completely dominates our world of social science of which finance and trading are a part.

But what if I were to say to you that maybe we have it all wrong? What if I were to argue that the endless data mining we all do -- the search for the perfect indicator, the perfect Fib level, the perfect volatility envelope are all just a giant waste of time. Ironically enough, empiricism would prove me right. Almost every trading system ever invented fails miserably under real-life conditions despite often showing perfect statistical accuracy often to the 99% confidence level. The irony of trading is that we put all our faith in an empirical model that empirically fail us.

But what if we set aside all of our modern tools of computation and started thinking like a 2500-year-old philosopher? What if we applied Plato’s Theory of Forms to the very pedestrian idea of a trend? Granted, trend can come in many shapes and sizes. It could be jagged and rambling with massive choppiness within it. It could be steady and smooth with hardly a retrace in the move. Or it could be something in between.

However, the “trendiness” of trend just like the essential “dogness” of dog is marked by some general characteristics that make it identifiable. In case of trend the best “class” of trend is one marked by higher highs in an uptrend and lower lows in a downtrend.

Thinking about this “Platonic ideal of trend” has really helped me refine my latest trading system. It made me eliminate any element that is extraneous to the setup -- and because it forced me to create much stricter rules for entry, I make much fewer trades. On the face of it that may sound like a negative to a daytrader like me, but in reality, it made my trades much more accurate than before. And it gave me clarity of analysis that I’ve rarely had before.

In the modern world, so full of experimentation and empiricism, we are conditioned to stay away from deductive reasoning. But perhaps the truth is just the opposite. Perhaps instead of running endless backtests to torture the price data, we should just imagine the ideal version of our setup. Perhaps in trading what we need is a lot less data science and a lot more Platonic philosophy.