Low-Frequency Vs High-Frequency Forex Trading
Many
Forex traders seem to think that by trading more frequently they are
opening themselves up to more opportunity and that this will cause them
to make more money. This is wrong; in fact, the main
thing that high-frequency trading does is cause you to become stressed,
frustrated, and take low-probability trades. The truth is that if you
know what you’re trading edge is and you are 100% certain of how and
when to trade it, you will find that you don’t really need or want to
trade that much. There is indisputable evidence that day-traders and
scalpers make less money on average than lower-frequency traders. We
will discuss that and more in today’s lesson, so let’s get started…
After you read today’s lesson, please
leave me a comment! Tell me if you learned anything in today’s article,
and if so, how will you apply it to your own trading?
Quick note: We
are strictly referring to retail human-being high-frequency traders in
this article, not proprietary commercial computer trading programs or
algorithmic trading which sometimes results in thousands or tens of
thousands of trades a day.
The quickest way to improve your trading is to…
…Stop trading so much! It is just a fact of human nature that the
more we stare at a price chart the more we get tempted to click our
mouse button and enter a trade. The fact that we worked extremely hard
for the money in our trading account seems to go right out the window
after staring at a 5 minute chart for a while. We also tend to
over-estimate our own capabilities of predicting the market’s movement
as well as ignore the real potential of losing the money we are about to
risk.More trades equal more time and more stress. I personally believe in trading the daily chart with low frequency, meaning I take much fewer trades than most traders. We all know most traders lose money…most traders also trade a lot, so commonsense dictates that simply trading less often (doing the opposite of most traders) will improve our returns over the long-run.
By knowing what your trading edge is and being 100% confident of how and when to trade it, you will find that it’s a lot easier to ignore the market when your edge is not present. When you trade less you can also risk a bit more per trade if you’re comfortable with it. Think about it, one trader trades 30 times a month and the other trades 3 times a month, obviously the guy trading 30 times a month can’t trade as big of a position size per trade as the guy trading 3 times per month. Not to mention that the higher-frequency trader is going to spend much more of his precious time in front of the computer, probably stressed out and frustrated. I prefer to spend less time in the markets and I also prefer to have low levels of stress, thus I mainly stick to the daily charts and I trade relatively infrequently compared to most traders.
The point is this: when you increase the quality of your trades you also increase the risk reward potential,
and rather than fighting against the market you are simply being
patient and acting only when the market shows your edge. This will work
to accelerate your profits whilst spending less time in the markets.
It’s sort of counter-intuitive, because in most professions more time = more money, that’s not so in trading,
in fact most traders do a lot better by spending less time in the
markets. Thus, you need to fight the urge to over-analyze, over-trade,
or trade on low-time frames charts.Low-frequency vs. High-frequency; An example
Do you want to increase your overall R-factor whilst reducing your stress and emotion in the markets? R-factor is basically your profit factor, and it’s how much money you make over a period of time in terms of your risk (R) per trade. So, if you risk $100 per trade, your R-value is $100; if you made $500 in one month that would be a 5R return. This is how you should think about risk and reward, not in terms of percentages. Percentages don’t really matter because a 50% return could mean you made $50 dollars or that you made $50,000 dollars…you see percentages are relative to your account size, what matter is dollars risked vs. dollars earned. If you are looking to build a consistently profitable track record to try and get an investor to fund you, they are ultimately going to be concerned with how many dollars you have returned relative to what you have risked.In order to show that higher-frequency trading does not equate to higher overall profits, let’s look at a hypothetical example of a trader who over-traded on the 4hr charts during one month versus a trader who traded less-frequently on the daily chart for the same month. The key point to take away from the example below is that both traders ended up with a 3R return for the month of May, but the first trader traded over 3 times as much, taking 15 trades in the month compared to the 4 trades of the other trader.
You can imagine that the trader who only entered 4 daily chart trades that month had far less emotion, frustration and stress, and far more time and ease of mind than the guy who entered 15 4hr chart trades and ended up with the same result. This is actually a relatively mild example, I know many traders who trade far more than 15 times in a month and lose money still, some of you are probably in that boat right now. So…why not try something different? TRADE LESS:
(Note: these were not actual trades; they are all made up for the sake of example)
So, as we can see from the example track record above, higher-frequency trading does not necessarily mean higher-profits. Obviously, this is not a real track record, but the point still stands; when you take more trades you are naturally going to have to endure more losing trades which will need to be offset by more winning trades just to achieve the same profit factor. Note the guy who traded the daily chart had a 50% win rate with the 4hr trader had only a 40% win rate.
Treat The Market Like A Garden
It might help to think about the market as a garden, and each month there are a limited number of vegetables that the garden produces, but there are a lot of weeds. The more vegetables you take out of the garden each month, the greater the chance you have of pulling a weed next time. In trading, there will typically be a limited number of high-probability / obvious price action setups each month, so if you don’t have the patience to only trade those obvious setups, you’re going to end up getting more losing trades (weeds) than winning trades (vegetables).The science of why people trade too much
Whilst the reasons why people trade too much can be many and varied, the primary reason is over-confidence. This is especially true after a winning trade or a series of winning trades. Traders tend to become over-confident after they hit a nice winner or winners and especially if they aren’t following a trading plan and are just trading off the ‘seat of their pants’. There is considerable scientific research that backs up the claim that most traders trade too often due to over-confidence. Most people over-trade due to “overweighting” their winning trades as Terrance Odean and his colleagues pointed out in their research titled Do Day Traders Rationally Learn About Their Ability?…However, when they are successful, these investors irrationally attribute success disproportionately to their ability rather than luck, leading investors to overestimate their own abilities and trade too aggressively; even investors with more past failures than successes may become overconfident by over-weighting their successes.Odean and company go on to discuss how the “aggregate performance of day traders is negative” and his research also underscores the fact that trading low-time frames and high-frequency trading become very addictive. Trading addiction is the only way to explain the fact that “over half of day trading can be traced to traders with considerable experience and a history of losses”, as quoted from their research. Why else would a day-trader with ‘considerable experience and a history of losses’ continue to day-trade if not for being addicted to it?
The primary thing to take away here is that you have to AVOID over-weighting your winning trades…they do not imply that you are “figuring it all out”…rather they should just be viewed as another execution of your edge. Remember that even if you are a trader who wins 70% of the time, you still never know which trades will be one of the 70% or when one of your 30% losers will pop up, thus you should never over-leverage your account or over-trade it…just trade when your edge is present, and over-time you should make consistent money.
• Men vs. women
Now, I know that most of my readers are men, but the fact of the matter is that we are going to have to swallow our pride a little bit here and take a play from the women’s trading handbook.
According to a recent article on the New York Times website, men have a tendency to trade far more frequently than women, which works to drive up their costs and lower their overall returns, see here:
This added trading drove up the men’s costs and lowered their returns. The economists found that while both sexes reducednet returns through trading, men did so by 0.94 percentage points more per year. In a telephone interview, Professor Barber said, ‘In general, overconfident investors are going to be interpreting what’s going on around them and feeling they are able to make decisions that they’re really not equipped to make.’ Short-term financial news often amounts to little more than meaningless ‘noise,’ he said. Far more than women, men try to make sense out of this noise, and to no avail.So, there are a couple important lessons to learn here:
1) Men tend to think they “know” what the market is going to do whereas women are more likely to accept the fact that they don’t “know” for sure what the market will do. The fact is that the women are right; no one ever “knows” what the market will do except for insider-traders with illegal information. So, the sooner you accept that trading is just a game of probabilities where the outcome of any setup is never “certain”, the sooner you will stop taking low-probability trades only because you feel like you are “sure” about what the market will do next.
2) Women are less likely to get obsessed with financial news and in trying to “figure out what it all means”. Men need to be more like that on average, if you don’t know why then please read my recent article on forex news and fundamentals.
I personally believe that women have less of a need to “be right” all the time than men do, this also makes them better traders. The market does not care about you or your little feelings, so being right and wrong and having an ego about your trading are all totally irrelevant things to your bottom line. Leave your ego at the door when you enter your trading room, because it’s NOT going to help you make better trading decisions; you can think you are right with every ounce of your being, but the fact is that the market doesn’t care if you think you’re right or not, it’s going to do what it wants because THE MARKET is always right, not you. So, learn to trade according to these facts and not in conflict with them, we can do this by simply learning to read the price action that the market produces for us and only trading when our high-probability price action trading setups are present.
Final thoughts…
Perhaps the core idea to take away from this lesson is that you should not assign too much significance to any one trade. Meaning, don’t start over-trading just because you become overly-confident after hitting a few good winners. Remember, you can achieve the same overall R factor over the same period of time by trading less frequently. You can do this by focusing on quality of trades rather than quantity of trades. If you want to learn more about how I trade ‘Low-Frequency’ price action strategies on the Daily Chart time-frames; check out my price action trading course and member’s community; my trading philosophy is based on trading only the highest-quality price action trade setups, which means less trades and less stress!
Works Cited:
Day Trading and Learning
How Men’s Overconfidence Hurts Them as Investors
About Nial Fuller
Nial Fuller is a Professional Trader & Author who is considered ‘The Authority’ on Price Action Trading. He has a monthly readership of 250,000+ traders and has taught 20,000+ students since 2008. Checkout Nial's Professional Forex Course here.Related
- Nial Fuller’s Price Action Forex Trading Course. Learn Advanced Price Action Strategies & High Probability Trade Entry Signals That Work
Thank you sir.
So in the final analysis the higher time frame would be the optimal time frame for most traders, especially the ones like me with little experience. (Yeah, I think that is exactly what you said in the first place!)
Thanks for another fine article. You have a unique ability to rattle my brain and make me think more with each article.
Krek
Nial thank you for the lesson, me to I had a vision of trading full time not considering a risk of that. You lessons bust my learning skills about trading, thank you again by giving me a confident about small account to trade with as long one has discipline and 100% edge of trading. I still reading your lessons and am fully happy by doing so, the reason I get a lot of indicators trying to convince to learn four hours and start trading, yes I’ll take three to six months to learn about price action. May confidence is growing each an every day when I read your work. My Forex Trading Plan is my first priority to discipline and control my emotion at times.
Thank you
Thabo NtshisiRSA
Just wanted to say thank you for sharing such powerful information. Following your simple ideas I’ve learnt a huge amount and made very profitable trades consistently.
Once again thank you :)
I have read this cool lesson and understand it. I will trade less now
I’m very grateful for the clarification of trading in higher timeframes, it helps me a lot because doing this you learn to be patient, the patterns are a lot more clear, and you don’t lose the money doing quick trades of 30 minutes and then looking the 4H TF and seeing that the trend was against you.
Cheers
I have been reading through your articles and I must say they are very interesting. BUT… There is something I don’t really understand about this high frequency vs low frequency trading.
The FACT is that most people come out with huge profit at trading CONTESTS organized weekly by brokers. If they only trade Daily charts and less trades, HOW are they able to perform so well within FIVE(5) DAYS? I also noticed that some of their trades lasts as little as 10mminutes. Your thoughts please….
Thanks a lot.
After reading this lession, I checked my trade journal. I have made 21000 rupees from daily chart but only 1900 from H4 charts. That clearly shows trading low time frames is no use.
Thank you.
Thanks Nial.
just wondering, because i want to became a full-time trader
As a result I started getting restless and traded a range even though my gut told me to stay out. Obviously it was a loser and I had to be humbled to learn my lesson – BE PATIENT AND WAIT FOR THE EDGE TO APPEAR! Thanks again Nial for all your priceless advice.
, Nial!
It makes so much sense to develop our plan ahead of time and stick to it, before we let our emotions “get involved”
Chuck Solomon
There is no doubt in my mind that your life’s work and teaching are on the level of a doctorate.
Thank you so much Dr. Nial.
Sincerely,
John G
Regard Milton
Thats one of the things I have to work on.
David
I think you are right but I disagree in one or two points.
As always you analyze and give your opinion truly and honestly so thanks
This article is worth reading again and again.In fact i have included it in my drill of continuously monitoring my susceptibility for making errors.
Thank you Nail
After going through the course and using your strategies successfully in a demo account for 3 months, I’m now in the second month in a live account with very good results so far. I now feel that at last I’ve found the right way to trade.
Thanks a lot for that Nial.
Excellent article…thanks for sharing your market wisdom!
Well done!
This is the absolutely wrong philosophy for trading.
Wait, wait, wait, patience. Good lord this is hard, but I’m going to do it.
What stands out most for me is the position size. I’ve been trading intra day because I believed I would have to have a very large account to make any real profits on daily or weekly time frames sticking to a one percent rule. This will take a bit to get my head around, I did the maths on risking 1% compared to 2% or more and it works out that because the drawdown is less with less risk, I can be more profitable only risking 1%. ??
You are right on point .I traded too many times in my first months. practically taking off duty to look at charts. Those were the days i lost the most. Hadnt discovered you by then. I later came to agree with this lesson . the fewer the trades,the better the results.
These days, i scan the charts for only 10 minutes. if nothing is sticking out, thats it for the day. Thanks so much
As a relatively new trader things that have contributed to the downfall of my first demo account are:
No trading plan
No trading diary
Seat of my pants or gut feel trading
Over trading
and
greed!
For me being able to recognise where I have gone wrong is a huge advantage which I will absolutely be making use of.
Nial is right, over trading is stressfull and time consuming so I guess if you feel yourself going for that trade the is without edge – DONT DO IT!
Si.
Toby
I certainly do have an ego, why to be hypocrite about it. Said that, one thing is for sure: I would rather by humble and successful than cool and broke how about you, fellow traders?
Nial, I love the “Garden” metaphor…
I am going to paste it onto my Trading Journal
MH
But my hope is rekindled and base on what is shared here, I am seriously saving to refund my fx account.
Thank you to the Team
I’m currently trading lower timeframes because I feel I have more trade management control, but I may change my mind for all the reasons stated. They are psychologically difficult and require much discipline !
But also a recent research concludes that day trading is more profitable than trading with weekly or daily charts.Nial,have you seen this report? Thanks for this wonderfull article.
Thanks for the article Nial. Reflecting on these matters is cathartic.
thanks for sharing wonderful article.
thank you nial
As a result I started getting restless and traded a range even though my gut told me to stay out. Obviously it was a loser and I had to be humbled to learn my lesson – BE PATIENT AND WAIT FOR THE EDGE TO APPEAR! Thanks again Nial for all your priceless advice.
I just realised that after turning my $500 account to $1000 last month, it was only 1.5R and I became overconfident to the fact that I made 100%. As a result of my overconfidence, Im currently down $400 and all of the trades were at 4Hr this month.
This article was like a rehab for me.
Thanks Again
-Simar