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Browse Topics:    Trading Strategies    Research & Analyze    

Time Frame Considerations for Bullish Trading

Making sure that your strategy timeframe and the market trend are in alignment can potentially help you employ a more effective trade strategy.

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One key consideration when contemplating any investment or trade is time frame. The term “time frame” simply refers to how long a trade or investment is held, or is anticipated to be held. As with many aspects of trading, there is no right or wrong time frame. Some traders – for any number of reasons – prefer to hold positions for as short a period of time as possible. As a result they tend to be short-term traders. Depending on the trader, the phrase “short-term” may be defined as anywhere from a few seconds to a few weeks or months. On the other end of the spectrum, some traders buy or sell short shares of a given stock and hold them for years. Any time frame can be effective. The key is make sure that you have some expectation and understanding of what time frame makes the most sense for the trade you are about to enter, and to act consistently.

Considerations to Take Into Account Before Entering a Bullish Position
Before you enter into a bullish position you should give some thought as to whether you anticipate the trade will be shorter-, intermediate- or longer-term in nature. While you can always change your mind later as circumstances change, it is helpful in terms of managing your own expectations to have some idea regarding how long a given trade might last.

One other possibility if the trade is being entered on a trend-following basis is to attempt to ride the position as long as it continues to trend, without concern for whether it ultimately is held for a month, a year or something in between.

Regardless of your preferred trading time frame, risk control is an important consideration. Even if a trader’s original plan is to hold a stock for the longer term, he or she should have some sort of contingency plan in place regarding what they will do if the stock starts to fall rather than rise as they had anticipated.

In many cases the decision regarding how long to hold a bullish position will among other considerations be based on one or both these factors:

  1. Personal preference based on individual temperament and risk tolerance
  2. The reason the trade was entered in the first place, or the “catalyst”

Factors in Choosing Trading Time Frame: Personal Preference
The question to ask is not necessarily “which time frame is best” but rather “which time frame am I most comfortable with.” Long-term and short-term trading can both be potentially profitable as long as the trader is comfortable with the time frame that he or she is utilizing. To illustrate this important factor, consider what would happen if the long-term trader decided one day to suddenly start jumping in and out of positions, or if the usually short-term trader started trying to hold onto positions for months at a time. It’s possible that both traders could eventually run into a problem in terms of sticking with their new, less comfortable trading time frame.

So before you buy a stock with the intent of holding the position for a long time, it is wise to realistically assess your ability to hold onto positions when they move against you.

Factors in Choosing Trading Time Frame: Trade Catalyst
In terms of specific catalysts, if you anticipate that a particular company is going to see a significant increase in sales and earnings, it is reasonable to expect that the price for that stock may advance over time should investors adjust their attitude toward the stock. As a result, if a company’s fundamental outlook truly takes a meaningful turn for the better, then it might make sense for a trader to consider buying the stock and possibly holding it for an extended period of time.

If the catalyst that prompted the trader to enter a position in the first place will require time to play out, then a short-term-trading time frame does not make sense. For example, if a trader buys a stock because the company has stated that they expect demand for their key product to grow significantly in the years ahead, then the trader will likely need to be open to the idea of holding the position for a long time and not necessarily being concerned with day-to-day price movements along the way.

At the other end of the spectrum, if a trader expects a stock to advance sharply right after what he or she anticipates will be a surprisingly positive earnings announcement, then they might consider buying before the announcement and then sell the shares soon after the announcement, regardless of the outcome.

As an alternative scenario, if a stock is already in an established uptrend prior to an earnings announcement, a trader might consider buying and then holding on to the position as long as the trend remains intact.

Pitfalls when Considering Trading Time frame
The biggest pitfalls regarding trading time frame tend to occur when a trader changes his or her mind about their anticipated trading timeframe, especially, if they have entered a position based on a different time frame expectation. Common time frame pitfalls include:

  • Entering a trade based on a short-term anticipated price movement and then deciding to hold on for a longer term after the stock falls sharply (rather than cutting a loss).
  • Entering a trade and expecting to get out with a quick profit if the stock rallies slightly, and then deciding to hold on for a little longer after the anticipated rally occurs.
  • Entering a position with the intent of holding for the long term, and then dumping the position after the first short-term up move in order to cash in a quick profit instead. This can be a sign of a lack of discipline and can result in a trader “making it up as he goes along” in the future. While each of the moves listed above may work out alright for a given trade, in the long run the act of routinely changing the expected trading time frame based on whims and random events is not recommended.

Summary
Each individual trader has personal preferences regarding how they will choose a trade, what they will trade and how long they are comfortable holding onto a given position. When it comes to such personal preferences, there are no right or wrong answers. What is most important is that a trader acknowledges their own preferences and consistently trades in accordance with their strategy. Trading time frame is an important consideration in this process.

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