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As a day trader, the topic of what chart time frame to use in one's trading is something that keeps coming up quite often. There are different answers obviously to this question, depending on who you ask.

The concept of day trading is nothing but trading during the day or during the normal or standard business hours without keeping any trading positions open overnight. This type of trading is quite normal and is often used by not just retail traders, but even established hedge funds and prop trading firms which focus on trading the markets in the very short term. Even the majority of high frequency trading firms makes use of algorithms that focus on day trading the markets for a few points rather than keeping trades open overnight.

The time frame that is used as part of your day trading analysis can be an important aspect that has the potential to define your success or failure as a day trader. In all fairness, some day traders make a decent profit day trading based off the daily charts. While for some day traders, a 1-minute or even a tick chart makes more sense in trading and is more profitable. This begs the question as to whether day traders should be using the daily chart time frame or stick to the intra-day time frames.

The best way to approach this question is to look at the pros and cons for both sides of this argument.

The way one trades the daily time frame charts depends on the approach to trading, the trading strategy being used and of course the trade management among a whole lot of other things. For example, at the very basic level, anyone can day trade from the daily charts. You can simply conduct your own analysis of the markets you are trading and place a buy or a sell order at the start of a new trading session on the daily chart. You can either hold your trade until you make a certain amount of profits or you can keep the trade open up to a certain amount of time before closing the trade for whatever profits the markets can give you.

At the same time, you can also cut your trade if it runs into losses or moves some ‘X’ number of points away from your trade position. On the other hand, traders can also day trade the intra-day charts based on a trading strategy such as Bollinger Bands or moving averages and depending on the trading rules that will eventually determine the profit or the loss in the trade.

The profits are there to be made, whether you day trade the 5-minute chart or the daily chart. Still, there are some factors to consider when you are day trading.

Day trading based off daily charts can be simple

In the first example, we take a look at a day trading example based on the daily chart time frame. The trade is taken based on analyzing the candlestick charts.

There are two samples of a short and a long trade based on the price action and technical analysis. First, a short position was initiated after taking into account the doji candlestick that was formed which came after nearly four consecutive sessions of gains. The doji candlestick, which signals indecision was a clue for traders that there could be a potential change of sentiment in prices. Therefore, a short position was taken at the opening session of the next day. The day trader could have held the short position open until the close and could have exited the trade at a profit.

Of course, had price moved against the position, the trader would have had to hold on to the losing position and closed the trade with a loss. There are different ways to manage a losing trade when trading off the daily chart, but that is left for another discussion.

Day trading on the daily chart time frame

Day trading on the daily chart time frame

The second example is that of the long position. Here, the position was triggered after the inside bar was initially formed. The next session broke out to the upside, resulting in a long position being taken. The trade could have been held until the closing hours, resulting in some profits. But note that the day trader in this example had to wait for one whole day for the setup to be validated before a long position could be initiated.

The above two examples are just one way to show how traders can day trade based on the daily chart.

Besides this, another example for day trading based on the daily chart time frame is to look for specific days when you can expect some big movements from the markets. This can work for stocks, forex, and futures as long as there is some big scheduled event that is bound to move the markets. Examples include, interest rate decisions, GDP reports, crop or weather report for commodities and so on.

The chart below shows the Euro Fx futures daily chart time frame, focusing on December 15th, 2016. This was the day when the U.S. Federal Reserve hiked interest rates for a second time by 25 basis points. Although the decision to hike rates was well communicated, the Euro fx futures fell on the day and continued the declines the next day as well.

This news based event would have presented a great trading opportunity for the day trader who would have shorted the Euro fx futures contracts and would have held the short position for a few hours until after the Fed’s announcement, knowing quite well that the U.S. dollar would strengthen and thus send the Euro fx futures contracts to close weaker on the day.

Euro FX Futures – Day trading based on daily charts (Fed rate hike decision)

Euro FX Futures – Day trading based on daily charts (Fed rate hike decision)

So far, the above two examples looked at just two ways how one could have made a profit day trading stocks or futures based on the daily charts without requiring too technical or complex trading systems. Even if the above examples would have moved in the opposite direction to the positions that were taken, a proper trade management or risk management principles could have helped the trader to limit their losses.

Of course, one of the key things, at least in the above mentioned trading examples is the requirement to be able to trade at the start of a new trading session. While for U.S. stocks this is not an issue for U.S. based traders, for markets such as Futures, which trade nearly 23 hours a day, it can require the trader to be awake at odd hours.

The risks associated with day trading on daily charts

An important aspect in the above examples is the trading method and approach. Most day traders prefer to be extra-cautious and look for signals from other indicators to confirm the trading bias. While the above examples might look easy in hindsight, it would take a lot of nerves for the trader, as they keep waiting for the trade to end up a couple of ticks in their position to book some profits.

When day trading based on the daily charts, the trader will have to constantly keep looking at their charts, unless the trade quickly moves in their favor, which is not always the case.

In contrast, day trading off an intra-day time frame, especially the 5-minute or the 30-minute chart can allow a day trader to have a more disciplined routine.

Let’s take a look at an example:

The U.S. stocks open at 9.30 a.m. This means that a day trader can start their trading day at 8.30 a.m. and prepare for the day ahead such as scanning the stocks, looking at the day’s events and economic releases and finally fire up the charts.

Because trading volumes are higher in the first hour of trading, day traders can take advantage of this volatility and look to making significant profits from day trading the 5-minute chart as an example.

Day trading Facebook shares using 5-minute chart and the opening session

Day trading Facebook shares using 5-minute chart and the opening session

The chart above shows the 5-minute time frame for Facebook (FB). You can see how the first 5-minute candle session sent the trading range for the day. Thus, using one of the common breakout day trading strategies, a day trader could have opened a long position at $80.6, targeting the round number $81 with stops at the low of $80.46. The day trader using this day trading approach on a 5-minute chart would have traded with a 1:2.86 risk/reward set up.

Depending on the number of shares that were trading the $0.40 move in the chart could have yielded some decent profits in under 30-minutes. If the profit made was equal to what the trader’s daily goal was, the trading for the day is pretty much done.

The next example is that of a futures chart, where day trading on the smaller intra-day time frames are more common and also includes the moving averages, to illustrate a day trading example using technical indicators as well.

Day trading futures based on 15-minute chart time frame

Day trading futures based on 15-minute chart time frame

In this example, you can see how combining the short term support and resistance levels are used alongside the moving average buy and sell signals. Again, depending on your trading goals, day trading on the 15-minute chart would have resulted in some quick profits in a just a few hours. Even in case the trade moved against your favor, based on your trading strategy and the technical signals you could have effectively managed the losses in the trade.

One of the advantages of day trading the intra-day charts is that it allows you to trade multiple times during the day depending on your trading goals, the strategy and how far out you set the take profit levels.

Trading on the intra-day time frame also gives you the additional benefit of being aware of any risks that can come up unannounced. This can be a surprising report about a stock or the industry or some geopolitical event that has the potential to upset the investor sentiment.

While you can still effectively manage your trades even when day trading on the daily charts, it requires a lot more experience and skill, which is something that can be honed over a period of time. Being stopped out of your trade, while trading on the daily charts would effectively put you at a disadvantage of having to enter the trade at a weaker price level that what you initially held. Attempting to open new positions at weaker price levels could potentially increase the risks of losing such trades and could open up your trading bias to emotions as well.

So, is day trading with the daily charts ideal?

For technical traders who are used to trading with technical indicators, day trading on the daily charts can take on a completely different meaning. While trends on the daily chart time frame can exist over prolonged periods of time, the short term correction to these trends established on the daily chart can be seen more clearly on the short term intra-day charts. This puts the day trader, trading the intra-day charts at a better advantage as they can effectively make more profitable trades in either direction than having to wait for the right set up which may or many not come every trading day.

You can see that the advantage with day trading with smaller time frame charts is that it gives the day trader a very disciplined style of trading and the day trader doesn’t have to stay glued to the charts as compared to day trading the daily charts which requires day traders to baby sit their trades. Of course, one could always argue that by taking steps to ensure that the trade’s stop losses are moved, a day trader trading the daily charts doesn’t quite require to be glued to their trading screens.

Even if one just walked away, the fact that they have an open trade running is something that is bound to keep coming up in their heads.

At the end of the day, trading is all about convenience and as long as you are comfortable day trading the daily charts and able to make a profit, stick with it. However, if you are just starting out day trading and still figuring out whether to day trade based on the intra-day charts or the daily charts, it is always better to start day trading with the intra-day charts as it gives you a better grip on your trades and your money that is being risked.

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