Trading systems (trading strategies) are usually designed for a specific market. When a trader is creating a trading system, they will configure the trading system's settings, such as the chart time frame and indicator settings, to suit the market that they want to trade. This means that each trading system will have default settings that work best with a particular market, and these settings will need adjusting if the trading system is going to be traded on different markets.
Adjusting the Time Frame
The chart time frame determines how often new bars (or candlesticks) are displayed on the chart. Longer time frames (such as an hourly chart) will display bars less frequently than shorter time frames (such as a fifteen minute chart). As a result, the chart time frame affects several different aspects of a trading system's performance:
- Bar Frequency - The chart time frame needs to be low enough that entry signals are displayed promptly, but high enough that the trade can reach its profit target before an exit signal is displayed.
- Trader Personality - The chart time frame needs to be compatible with the personality of the trader. If a trader is impatient and wants their trades to last only a few minutes, a thirty minute chart is not going to be suit their trading personality.
- Target and Stop Loss - In general, the higher the profit target, the longer the chart time frame needs to be. For example, a target that is twice the hourly range is usually not going to be reached using a three minute chart time frame.
- Trading Style - Day traders will need to use shorter chart time frames, while swing and position traders will usually use longer chart time frames.
Adjusting the Indicator Length
The indicator length determines how many bars (or candlesticks) are included in the indicator calculations. For example, a thirty bar moving average includes the most recent thirty bars in its calculation. Longer indicator lengths will produce smoother indicator lines, and shorter indicator lengths will produce more erratic indicator lines. Indicator lengths affect various aspects of a trading system's performance:
- Number of Trades - Shorter indicator lengths will produce many more entry signals than longer indicator lengths. For example, a short indicator length (such as ten bars) might signal fifteen trades per day, whereas a longer indicator length (such as twenty-five bars) might only signal six trades per day.
- Target and Stop Loss - As shorter indicator lengths produce more entry and exit signals, they require much smaller profit targets, because a trade will have less time to reach its target before an exit signal is displayed.
Finding a Profitable Combination
Adjusting a trading system to suit different markets requires finding the right combination of both chart time frame and indicator length. As there are an unlimited number of combinations available, it can take a significant amount of time to find suitable settings. One valuable suggestion is to consider the speed of the market in question. Faster markets (usually markets with larger daily ranges) can use either short or long time frames, but slower markets (usually markets with smaller daily ranges) usually require shorter time frames.
