As an active trader, I find that time in all its facets is never far from my mind. I’ve often thought that understanding time and trading styles is one aspect of trading that is often overlooked. This problem stems from the widespread acceptance of certain definitions of trading styles. And, while I am not here to claim those definitions to be wrong, I do want to share another perspective and perhaps start a discussion, or, more importantly, get traders to question “conventional wisdom”. I use a different view when I enter trades and manage different positions.

Trading styles have most often been defined by the amount of time spent in the position. I completely disagree with this definition. Rather, let’s examine how to define trades by the current market environment, or more to the point, the current market cycle.

All markets move in cycles and are either trending or sideways. Neither the length of the trend nor the time spent in a range can be predicted, but the characteristics of each cycle can be identified. Because they can be identified, we can, in turn, trade each cycle in the best manner possible to make the most of either a trending or range-bound market. Trading an established trend is very different from trading a market in a range.

Let me make this point: The entry style is the trading style. So, for purposes of this article, and also for purposes of discussing trading styles in this new light, we will discuss them as “swing entries” and “momentum entries”.

Swing entries are those made in an established uptrend or downtrend. It is a swing trader’s “job” to sell bounces in a downtrend or buy pullbacks in an uptrend. The charts, or more specifically price, will tell you where and when to buy or sell into the trend.

Momentum entries are best applied in range-bound or sideways market. Momentum trading is all about waiting for a sideways market to reveal the direction by either breaking to the upside or the downside.

Applying these entry styles to different time frames is as easy as recognizing a trending versus sideways market. (I do this by using what I call the “Wave”, and you can access some video playback about this tool on my website.)

Figure 1: Momentum Example

Figure 2: Swing Example

Time frames have no impact on the entry style. I can put on a swing trade on a three- or thirty-minute chart as easily as I can put a momentum trade on a daily or 240-minute chart. It’s all about recognizing the current market cycle and entering the trade accordingly. Somewhere along the line, trading types were given their definition based on the time spent in the trade, which, frankly, has no basis in reality.

Suddenly, traders who decided to sit in losing positions longer than they initially may have wanted to, turned what was often simply a “day trade” into a “position trade” and, then, sometimes, even into an “investment”. Although I am taking a slightly sarcastic tone here, this scenario is not off by much. Whether I choose to enter a trade or not, the time I will spend in the market does not define the trading type. The trading type is defined by how I enter the market...and how I enter depends on the market cycle.

When I hear traders talk a “longer-term view”, that’s really code for “I am willing to take some heat (unrealized loss) before the positions go in my favor.” Typically, the only trades that should have extended or large unrealized losses are those with bad entries. As has been said often, “A good entry makes for an easier trade.”  

Conversely, when I hear a trader say, "I am a 'scalper'," that tells me the trader has no tolerance for loss, and taking heat is not within his or her comfort zone. Trading is all about recognizing, accepting and managing risk. A certain amount of “heat” is part of every trading set-up.

The consideration of where to place the stop-loss for any given trade should be aligned with where that trade is no longer valid; however, that is seldom the case for most traders. Most traders consider a dollar loss rather than a point on the chart. Yet, a dollar-based stop-loss has no basis on the chart or in the market in general.

The other side of the coin is the profit expectation. Often, swing traders feel that, by staying in the market longer, they are positioning themselves for a larger profit. There is no clue to this at the onset of a trade. If a trader is able to enter any trade and that trade becomes a longer trend, it turns out well. If the trade does not, the swing trader will often sit in a losing trade and justify the position by saying, “I am a swing trader and have a longer time horizon."

Momentum trades don’t necessarily reduce misguided profit target judgments either. Often, these traders will exit trades too early and re-enter a number of times until finally a sharp turn erases much hard-earned profit. The profit target rule I live by is this: Exit when you can, not when you have to.

Let’s take a recent example from the Forex market.

Figure 3: 60-Minute GBP / USD

This example shows a strong trend on the 60-minute chart of the GBP / USD (Great British Pound / U.S. Dollar). This pair climbed strongly as it headed toward the 1.8600 level. Because this market already rallied from the 1.8300 level, it would be easy to say that it was in a strong trend upward. As this market rallied, it would be any trader’s job to exit with the rally a little at a time. The resistance in this market would be excellent guidance.

No one knows the location of the top. We can only identify potential resistance levels, and, eventually, one of those levels is likely to reverse the uptrend. The trick is that we don’t know which one. 1.8600 is what I call a “major psychological number”, as were 1.8500, 1.8400 and 1.8300. Each could have been where prices reversed, and this would be applicable on any time frame. The turn came at the 1.8600 level, after which prices sold off 200 pips of the over 300 pip climb.

Now, if you took profits with the trend at resistance levels, you managed your risk and still profited. If you exited when the sell-off began, or worse, when the sell-off accelerated, you would be trying to exit when it was obvious to the entire market. This only makes the price fall harder and faster.

As long as momentum was in your favor, you could stay long. As long as the trend was in your favor, you could also stay long. But, there is no reason to ever put a time limit on the trade. If your trading style dictated a one-to-three-day trade hold, would you get out just because time expired, even though the trade was still valid? Of course not. The same goes for if your trading style dictated a ten-day-to-two-week window.

A trade’s validity is not based on time but, rather, price. Entries are not based on time spent in the trade but, rather, the market cycle. If you are looking at a sideways market, wait for the breakout or breakdown and trade with the momentum. If that momentum turns into a trend, you can trade the pullbacks (uptrend) or bounces (downtrend).