Trading short time frames

I’ve learned a thing or two about using very short time frames or aggressive trading when using automation. I’ve tried and tested this method with Trade-Ideas. If you are very aggressive and looking at 1 – 2 minute charts, it can get very challenging very quickly. You’ll have these awesome backtesting results but when you put your strategy to the test in the real market, you constantly get stopped out. 

I’m going to go over some key takeaways that I’ve learned with these types of aggressive trades and the challenges they pose when trading with automation in Trade-Ideas. If you don’t use Trade-Ideas, that’s fine, the principles are the same regardless if you are automating your trading or not.

Challenge #1 Back-testing results are great, but never perform as good as they “should”

This is a very common problem when trading very short time frames. Usually when you are looking for breakout’s type strategies in the 1-2 minute time frames, you are going to get A LOT of signals. 

As you continuously filter down your trades to try to select only the winning ones, You usually still end up with several trades happening in the same day. 

Furthermore, once you’ve done all the work, let it run for a few days, the results are just not there.

optimized then failed

I worked several days on this particular strategy. As you can see when I did the optimization, the equity curve was beautiful. In my mind, I’m going to be rich in no time at all. I put it into test mode in the markets. The first few trades I was flat… its okay, it takes time, but then it was all downhill from here. What happened and why?

Back-testing does not promise future results!

This is always the case for every automated trading strategy. Especially when dealing with shorter time frames. All you’ve done so far is “remove” all the bad trades from the trading strategy. In theory, this should mean that those bad trades that you’ve filtered shouldn’t happen again if a stock did the same thing. However, with shorter time frames there are just too many variables. 

Shorter time frame usually mean tight stops

Usually when you are trading with short time frames, your stop and targets are not as wide. Everyone likes a nice tight stop to prevent losing more money in the market, but if the stops are too tight, you don’t give enough time for the pattern to play out. Speaking of time…

The market needs time for price to move

Yes in shorter time frames the market can move very quickly and you can make lots of money quickly, but it can also reverse just as fast. With the amount of algos and computerize trading, these knee jerking reactions does not really represent the real sentiment of the market. 

Price needs time to move from the real traders trading the market. If you have a really solid bullish flag pattern on the hourly chart of AAPL for example, you’ll see a lot more conviction from all the traders looking at the stock. That conviction leads to more buying, and because of all that extra buying, the stock will move up. 

In short time frames, the conviction might not be there. There isn’t enough people seeing the same pattern on a smaller time frame and since we have less people buying, the stock may not rise as expected.

Shorter time frames patterns vs longer time frame patterns

As automation traders, we are looking for common patterns that play out frequently in which we can get into. Whether you are trading flag patterns, hammers, morning star reversal, breakouts, etc, the time frame in which you trade these patterns can dictate the likelihood they will play out in your favour.

What do you think the odds are for a bullish flag pattern on a 1-minute chart playing out as expected vs a bullish flag pattern on the hourly chart just like in the Apple example above? Even if you backtest it and put all the filters to find all the perfect bullish flags with past data, the chances are that the future ones on smaller time frames will always be less than ones of higher time frames. Again, there probably isn’t enough conviction from the market participants.

Challenge #2 The price is moving too quickly or the spread is too wide

Trading in the first 30 minutes of the market open can create a lot of opportunities but it also create some challenges. Especially if your strategies are looking for stock in play (stocks that are gapping due to some sort of news related to that stock).

Fast moving price

When you backtest, the backtesting tool cannot really test if you get skipped on a trade or not. It’s possible that your strategy is looking for extreme volume stock in the first 5 minutes of the open that you just simply will not get filled on your orders. Yet when you backtest this, the tools say you did and were profitable.

While you can change your order to offset some pennies to compensate a fast-moving stock, you don’t want to set this too high otherwise you start messing with your risk to reward ratio.

You could also leave your order open longer and hope to get filled. I find that if I leave my price open longer than a couple of minutes for my more aggressive strategies, 1 of 2 things happen. 

1. I’ve missed the trade. The price simply just doesn’t come back to where I wanted to buy it and it’s already hit my target. 

2. I eventually get filled but by this time the move and the pattern is no longer valid and I get stopped out fairly quickly.


Spread can kill a trade

Spread is usually my #1 enemy when it comes to my trades. It can get even worst when you are trading on smaller time frames because usually your stops and targets are tighter than if you were trading a bigger time frame. 

Example of small time frame spread trade killer

You want to get into the stock of XYZ at $10.50, your stop would be $10.00 and your target would be $11.50. That’s a risk to reward ratio of 1:2. However, there is a $0.25 spread. 

At this point, that means that the spread is already 1/2 to your stop loss. If you get triggered into the trade at $10.50, the current bid would already be at $10.25. Now with 200 shares that might not seem like a lot but imagine 6000 shares? 

WATT spread
46 cent spread on an $8 stock!!!

Spread can quickly get you stopped out in your short term trading strategies. To make things matter worst, you could get slipped past your stop loss and take an even bigger loss than you planned.

The spread on most stocks in play can be pretty big in the first 10-15 minutes of the market open. The spread can get worst if the float of the stock is low, or if the volume is low. 

The good thing about low float stocks and low volume is that you can filter these out easily with Trade-Ideas. One filter I use for all of my strategies that at least 500,000 shares traded every day in the last 3 months. Some of my strategies require at least 50m share float.

So is short time frame trading bad?

Not necessarily. My 2 best strategies actually use a 5-minute breakout alert. You can see all the strategies I use in my automation here. But knowing the challenges mentioned above, I am careful and very picky when it comes to which strategies can run and which cannot during higher volatility periods. 

If you already master trading hourly charts, then why try auto trading 1-minute charts? Automate your best trading plans, once those are up and running, then you can practice on different time frames.

If you trade longer time frames you can widen your stop and targets. This gives your trade more room to breath and allow it to play out the pattern you are trying to trade. You can also widen your stops and targets for shorter time frames but be sure to adjust the size of your position so that you don’t mess up your reward to reward ratio. Overall you can still be very profitable as long as you understand the extra risks when it comes to trading fast-moving stocks.

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