I was just asked by a trader about how I determine my holding time for positions (trade timeframe). Specifically, Brian asked:
If you buy a pattern breakout off the daily (chart), how do you know it will run? I “thought” you might take some of these and see where they go, meaning if it closes at the HOD you would hold for a swing/multi day move. If not, you might just bail and scalp it?
So what Brian is asking is whether I’m gauging the price action to determine my holding time. Stated another way, he’s asking if I am deciding on overnight positions based upon how well a stock is acting.
Here’s what I told him…
I identify my timeframe for the trade before entering, so I know how I’ll expect to manage it (tighter for day trades, a little more room given to swings) going into the trade. I determine this based on the quality of the pattern and the size of the pattern. The cleaner the pattern and the more time involved in the development of it, the longer the timeframe I think it’s valid for. The smaller the pattern, the less time I’ll trust it.
For example, a pattern like a bull flag….
One which has 3 sharp up days and then 4 rest days (flag), I’ll likely take for a shorter timeframe like a day trade.
Another which has 7-8 up days and then 10-12 days of rest to build the flag, I’ll likely take for a longer timeframe like a swing trade.
Basically, it’s a matter of trust and validity. The bigger patterns pull in traders of multiple timeframes, which can produce a longer-lasting move. On the flip side, the smaller patterns tend to pull in only traders on the shorter timeframes, which to me means the move should not last very long and I’ll need to bail after the initial move.
For me, deciding on my trade timeframe prior to entry also helps me size my position properly. It’s not the only way to do it, but it is what works best for me.
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