If I had to use a metaphor, I’d say that trading is a lot like predicting the actions of shoppers in a mall.
At the individual level, I can’t accurately predict if a particular shopper is going into walk into Levi’s and buy a pair of jeans.
Whether Susan buys a pair that day might depend on whether she’s in a good mood, whether she felt fat, or what she had for lunch. And there are an infinite other factors that could easily change her mind.
If I had to bet that Susan would walk away with a new pair of jeans that day, my odds of winning aren’t good.
But what if I broadened my scope to bet on a different level?
How about betting on at least 10 people buying a pair of jeans from Levi’s that day?
Which is a bet I’m more likely to win?
- That one particular shopper (Susan) would buy a pair of jeans from Levi’s on Monday; or
- That 10 people would buy a pair of jeans from Levi’s on Monday
Obviously, I’d be more likely to win the second bet.
This may seem like common sense, but it’s certainly not common in trading practice.
Short Term Amusement
Too often, traders look to the short time frames to predict where the market will go in the next few hours.
To make money, they have to be right about (1) the market moving within a very limited time period, and (2) it moving in the anticipated direction.
This is like zooming in to the individual shopper and predicting that Susan will (1) buy something, and that (2) it’s going to be a pair of jeans.
That’s a tough call. Predicting the outcome of the small-scale is excruciatingly difficult.
Here’s a live example of market prices moving in a completely unpredictable manner, on the EUR/USD 1 hour chart:
I have yet to see a trading method that can consistently handle price movements like this.
On the daily chart however, such erratic moves are but a small blip:
Look at both charts again – in which time frame would it be easier for you to trade in?
The Bottom Line
When trading in the short term, you’re setting yourself up to be slapped around by the inevitable, random price swings in the market. These swings are often meaningless, and can turn around just as quickly as they began.
On the larger time frames however, price moves are a lot less random.
Trading is a game of playing the odds; Two traders can be trading the same currency pair, but if they’re trading on different time frames, they’re playing different games.
Which is the smarter thing to do? To play the game where the outcome i more random, or less random?