If you would like to get a room of e-mini traders into a vociferous argument, state in a boisterous manner, that 2 minute charts are the very best for trading the ES e-mini contract. Every successful trader has a distinct preference for a certain time period when trading. These preferences are generally the result of longtime experience and success in his or her trading career. No two individuals trade in an identical manner and time period for each bar on a traders chart is a matter of personal experience. Generally speaking, I have watched traders who trade in the scalping style use 1, 2, 3, and 5 minute charts. There are advantages and disadvantages in using each time period.
As an aside, time-based charts are not the only type of trading charts in use by professional traders. There are range-based charts, Renko-style charts, point and figure charts, and tick charts, just to name a few. The study of these charts will be the object of my next few articles. For today, we are going to go over time-based charts.
Let's start at the beginning. The amount of time for each bar on a chart is at the discretion of the trader. For example, a 1 minute chart assigns exactly 1 minute for each bar on the charts. The same logic holds true for 2, 3, and 5 minute charts. Each time period shows a different perspective of the price action on the chart under observation. There are distinct advantages and disadvantages for using various time periods in your trading. For the sake of clarity, I am going to make a few assumptions about the intended reader of this article:
— You are a trader with a trading account under $ 25,000
— You are a trader who trades in the scalping style.
— Your goal is to maximize the return on your investment while preserving your capital.
Very few traders use 1 minute charts because they typically present price action at a rapid rate, which results in many false setups. I have seen traders use 1 minute charts to get a different view of the market, but generally speaking these charts are very difficult to use effectively. In my experience I have found 1 minute charts to be of little value.
On the other hand, it is fairly common to see 2 and 3 minute charts on the majority of most traders who trade in the scalping style. For me personally, I prefer to use 2 minute charts when trading the YM contract. I do this for several reasons. The YM contract is often a slower moving contract than the ES contract and has considerably less volume, so I find a 2 minute gives me a more accurate view of the price action. Also, the YM contract is dominated by smaller traders and less dramatic price movement. The ES contract is a far different animal than the YM contract; it is a high volume e-mini contract that is loaded with professional traders and sophisticated trading technology. For these reasons, I use a 3 minute chart to slow the action down some and give myself time to get a better read on what is actually occurring on the chart. On certain days, especially very active days, I will use a 5 minute to provide even greater clarity. On days when I am having trouble getting a good read on the market action, it is not unusual for me to switch intermittently between 3 and 5 minute charts in an attempt to ascertain which time period is most beneficial in spotting setups.
In general, larger accounts tend to concentrate on 5 minute charts, as they provide excellent clarity and spotting training and consolidating markets. The reason large traders typically trade higher number time charts is they have deeper pockets and can withstand greater moves against their positions. As a smaller scalper, we tend to have shorter stop loss limits and tighter management on our trades. For that reason, smaller traders tend to trade 2 and 3 minute charts. Smaller traders simply do not have deep enough pockets to allow them the time it takes for broader market moves to develop. As a side note, institutional traders often trade 15 minute charts, as they have a nearly unlimited amount of capital to back their trades, and these traders are generally not scalpers but swing traders and trade broad trends as opposed to scalping 2 or 3 point points out of a trend.
In summary, we have looked at a variety of time periods that traders utilize in set up analysis when trading the e-mini contracts. I believe very short time periods do not provide the smaller trader with a very accurate view of the market; the short periods tend to indicate to many false setups. I also stated that the midrange time periods (2 and 3 min.) Provide an excellent insight into trading setups, and suggested that, at times, 5 minute charts can be helpful to the smaller trader or scalper. Finally, I have pointed out that large trading institutions often use 15 minute charts in their trading as they are generally looking at broader trends in the market. As a trader, experiment with different time periods and find which time period resonates most effectively for you on the YM and ES e-mini contracts.