Last Updated on 11 September, 2023 by Samuelsson
When most people start trading, they often ask the question of what timeframe they should go for. Online you may see so-called “trading gurus”(who often don’t know profitable trading themselves) explain their daytrading strategies and methods, but for a majority of people, the daily timeframe will work best, by far!
The daily timeframe or daily bars means that your chart is set up in a way so that each bar represents the trading activity for one whole day. With most larger institutions using the daily close prices to analyze the markets, daily bars also become a lot more significant than any other arbitrary timeframe, like the 5-minute bar, just to name one example.
In this complete guide to the daily timeframe, we will answer the following questions:
- Why is the daily timeframe more significant than other timeframes?
- What are the benefits of trading the daily timeframe?
- Are there any disadvantages?
We will also cover how you get started trading the daily timeframe!
As you see, we have a lot to cover, so let’s not waste time!
What You Need to Know About the Daily Timeframe (Important!)
If there was one only thing you should learn about the daily timeframe it’s this:
Daily bars are more significant than minute bars.
So what do we mean by this?
Well, since daily bars encompass much more market action and trading volume than for example 5, 10 or 30-minute bars, it also means that more market transactions stood behind the patterns that the market formed.
For example, if we spot some type of pattern in the 5-minute chart, it might have been formed with only 100 transactions. But if we were to spot the same pattern on the daily timeframe, it would mean that we probably are looking at tens of thousands of transactions, or much more, depending on the security.
Now, the real reason why it’s such a great advantage, is the randomness of markets.
Most market action is random, and very little holds a real edge.
And the smaller the timeframe, the more randomness comes into play, since less trading volume is required to move the markets.
Following this, the higher significance of the daily timeframe is a result of that more volume was required to move the market.
To make it clearer, you could say that the non-random elements of the market become more visible, as the random price movements even each other out. The result becomes that we can trust the movements of the daily bars to a greater extent.
However, randomness isn’t a negligible factor in daily timeframes, but plays a big role there too. It’s just that it plays a smaller role than in the smaller timeframes.
Benefits of Trading The Daily Timeframe
While less market noise is perhaps the biggest benefit of the daily timeframe, there are many more that you might want to know about. They’re not only related to the technical aspects of trading, but also to the emotional factors that play a big role in trading success.
Let’s have a look at a few of them!
1.Takes less time
Naturally, with a bar type that only closes once every day, you will have to spend a lot less time in front of the computer. You may do other things than just staying glued to a screen waiting for your strategy to issue a signal.
The only thing that’s needed to run your trading, is to watch the market after it has closed. You don’t even need to time the close of a bar, since you most times will be placing orders for the coming trading day. As such, you can check your strategies whenever you find the time, which shouldn’t be an issue, considering that you have a time window of several hours when the market is closed!
Of course, you need to monitor the losses and use a stop loss as well, to get out of positions that go against you. However, stop-loss orders can be placed with the click of a button, and will exit the trade for you if your stop is hit.
In other words, trading daily bars is perfect if you’re short on time!
2. Bigger Profits
Trading the daily timeframe, you’re mostly holding your trades longer than intraday, giving the trades more time to develop in your direction.
This leads to a higher average trade profit, and makes you more resilient against costs that could otherwise eat into your profits.
3. Transaction Costs Are Kept Low
With lower timeframes, you often face the issue of too low average trade and high commission costs.
For example, let’s assume that you have a strategy that places 1000 trades each year, at a cost of $5 per trade.
Then assume that your capital is $20,000.
In order to just break even, you need to make 25% a year, to cover up the commission cost. (1000*$5)
However, if you were to trade a daily system that only makes 100 trades a year, then the return needed to go break even only becomes 2,5%.
In that sense, the daily timeframe will let you keep more of the profits you make.
4.Less Screen Time=Fewer Mistakes
Now, another thing that costs traders a lot of money, is making mistakes.
Once you have a trading strategy that works, you need to stick with it to make money. Your edge is in the trading strategy, and as such, straying away from it won’t produce good results.
In fact, not following the rules set in your trading strategy is the same thing as replacing a true edge with randomness. You become more of a gambler than a trader.
Now, the allure of making arbitrary decisions is often very hard to resist. As such, the less screen time, the lesser the chance that you will fall for it.
To conclude, trading the daily timeframe makes you less prone to making mistakes, since you aren’t spending as much time thinking about your trades and monitoring your positions!
5. More Time to Develop Your Trading Strategy
What matters most in trading, is the strategy or strategies you trade. A trader cannot be profitable in the long run, if his or her trading strategy lacks an edge.
Developing new trading strategies takes a lot of time, and doing trading styles like daytrading means that you spend most of your time trading, leaving you with very little time to test and find new trading strategies.
With the daily timeframe, you could spend as little as 15 minutes on your trading each day. This leaves you with plenty of time to develop new strategies and enhance those you already have.
6. You Can Work Full Time!
Most people don’t rely on trading as their main breadwinner. Instead, they use it to supplement their incomes, and grow their capital at a faster rate than is achievable with passive investing.
Trading the daily timeframe lets you keep your current job as your main stream of income, without having to abandon the profit potential that comes with trading the markets.
In fact, we have a separate article that elaborates on the idea of swing trading while working full time!
Just to give you an idea of what trading could do for you, let’s use our compounding calculator to visualize the difference trading part-time could make to your account balance!
Imagine that you invest $10,000. Assuming that you get the average historical return of the S&P-500, your capital would be worth $26,000 dollars.
Now, if you managed to outperform the S&P500 by 10 percent annually, you would instead end the period with $62,000.
Thanks to compounding, a difference of a few percentages will have a huge impact on the final results if you just let the capital sit long enough!
Disadvantages of Daily Bars
Of course, trading the daily timeframe also has its disadvantages. Let’s have a look at the two most significant ones!
1 .Overnight Gaps
The most common objection people have to trade daily bars, is that you keep the positions overnight. When the market is closed, you cannot get out of your positions in case of some type of black swan event. You will have to wait until the market opens, and by then it might be far below your stop loss.
The risk of overnight gaps indeed is true. To avoid going bankrupt in the event of some black swan event, you must ensure that you don’t risk too much on each trade. Still, this is pertinent to all types of trading, and not only the daily timeframe.
However, what most people don’t realize is that you are paid for taking that extra risk.
What do we mean by this?
Well, compare the two curves below:
The first one represents the gains of the S&P-500 (more specifically the SPY ETF) if you only hold trades during the day.
The other one represents the gains if you went long on the close and sold by the opening bell.
The market performs better overnight. Hence, the extra risk you take pays off.
So, as you see, the overnight risk isn’t that bad at all. All you’re doing is bartering some additional risk for some extra profit!
3. Less Trading Opportunities
Trading daily bars means that you, in general, have fewer trading opportunities in any given instrument. The data “moves” more slowly, with a new bar forming once every day.
While this holds true to some extent, it’s not necessarily a disadvantage. Some trading educators who don’t know so much about trading themselves, make it seem like all trades are equally profitable. Quite on the contrary, if there was one rule that held true, it would be that the more selective you are with the trades you take, the more profitable they will be.
Daytrading doesn’t mean that you’re in and out of a stock several times a day on a general basis. Instead, most of your time will be spent waiting for the right signals. You will be scanning through a huge list of stocks only to find those few that are worth your time. And that number could be as low as 1% or less of all the stocks you’re scanning through!
Another aspect that nearly completely dismisses the issue of “too few trading opportunities” is the fact that there are thousands of stocks to choose from. Combining this with having 2, 3 or even more strategies, will ensure that this never becomes an issue.
Instead, you get the huge advantage of having so many options that you can afford to be highly selective and only pick the absolute best trades!
Should You Go With The Daily Timeframe?
You may have noticed that we to some extent refuted the negative aspects of the daily timeframe, and instead turned them into advantages.
Now, a timeframe isn’t better than the strategy used to trade it. As such, you should focus on the trading strategy.
And trading strategies are much easier to find on the daily timeframe than on shorter timeframes. In addition, daily strategies tend to be more robust than intra-day strategies.
We recommend everyone who is new to trading to start with swing trading on daily timeframes. It’s much easier than intra-day trading, and holds great profit potential. Once you want to go more advanced, there is no question that algorithmic trading is the way to go!
How to Trade the Daily Timeframe
So, you feel like you want to start trading daily bars. Well, then you’ve made an excellent choice!
In this part of the article, we are going to show you the two most common approaches to trading daily bars, namely swing trading and position trading
Swing trading is the best trading form for beginners and those short on time.
As a swing trader, you hold your positions for one day to a few weeks at most. This means that you’re in the market for enough time to catch those medium-term moves in the market that a daytrader would miss.
Once you have your trading strategy up and running, your trading could take as little as 15 minutes each day. You just run your strategy through a scanner, see if there are any buy signals, and then place the orders for the next day.
If you want to read more about swing trading, we recommend that you take a look at our complete guide to swing trading!
Position trading is a trading form that where you hold your trades a little longer than in swing trading. The holding periods usually is somewhere between a couple of weeks, to several months, or sometimes years.
Position traders usually rely on some form of trend following logic, meaning that they try to find trends that are likely to continue, and ride them as long as they can.
While position trading works still today, many of those trend-following strategies that were used back in the 60s and 70s don’t work that well anymore.
However, that doesn’t keep some youtube “trading gurus” from preaching the methods as functional in today’s market….
Discretionary or Systematic Trading?
Regardless of what type of trading you want to do, be it on the daily or minute timeframe, you will face the choice of going with systematic trading or discretionary trading.
By systematic trading, we mean that you use clear buy and sell rules that you have tested on historical data for validation.
By discretionary trading, we mean that you plot indicators and other technical analysis on a chart to try to visually determine when to enter a trade.
Our outright opinion on this is that the only of the two that works well in today’s market is the systematic approach. You need to define your edge and ensure that it actually works!
Of course, there will always be those who succeed to trade discretionarily. However, this is because they’ve managed so memorize some pattern, unconsciously or not, and put it into practice in the markets.
The Two Most Common Trading Strategies for the Daily Timeframe
Now that we have covered the two most common trading styles, it’s time to cover the two most popular trading strategy types.
Mean reversion is the tendency of a market to make exaggerated moves in either direction that are corrected by a reversion to the mean. As traders, we try to identify those times that a market has moved too much too either side, and act on it by going against the short term trend, hoping that a reversal is imminent.
Those times a market has fallen too much, we say that it’s oversold, and when it has gone up too much, we say that it’s overbought.
Mean reversion works very well in stocks, and most of the trades in our swing trading signal service are mean reversion trades.
The second common trading strategy type for the daily timeframe, is trend following. In trend following strategies, we assume that the market is going to continue in the direction of the momentum, and act on it by following along.
As such, the trend-following approach is based on the completely opposite premise, when compared to mean reversion. How strange it might sound, you can trade mean reversion and trend following strategies on the same market. The difference lies in how you define the oversold/overbought conditions where the market tends to revert to its mean, and those times when it’s worth following instead.
How to Get Started Trading Daily Bars – Step by Step
Having come this far into the guide, we are sure that you want some quick and actionable tips on how to get started trading the daily timeframe.
So, here are the steps you need to take!
1. Find a Trading Strategy
Every profitable trader has a profitable trading strategy. You simply cannot do without it.
While many people believe that you may use common indicators as they teach in books or online, that’s certainly not the case. We have tried most of what is out there on historical data, and very little is tradable at all.
You need to build your own trading strategy and use backtesting to ensure that it’s robust and works in live trading.
In our massive guide to building a trading strategy, we show you how it’s done.
2. Create a Trading Plan
Once you have the strategy in place, you need a trading plan. This is where you dictate your rules regarding things like position sizing and drawdown management. Here are the things you should consider including;
Drawdowns- What do you do if you go over a certain drawdown threshold. Should you decrease the position size, or just keep it like before?
How much should you risk– Determine how much you are willing to risk on a single trade. Also, be sure to go over your maximum allowed risk for all your positions. For example, being long in three stocks, risking 2% in each, means that your total risk is 6%.
When to stop trading the strategy– All trading strategies fail eventually. As such, you must know when it’s time to abandon your trading strategy. Usually, a multiple of the max historical drawdown will do.
3. Scan for Signals
Now you take your trading strategy and put it into some type of scanning software. Then you just take the signals as they appear.
4. Log Your Trades
Be sure to keep a trading journal where you log all your trades and your emotional state. This will be of immense help later, as you come back to see where you need to improve. As time passes, you will start to make out patterns and can identify what’s holding you back. Here are some of the things you should include in a trading journal.
Trade information such as entry date, exit date, and position size
Your emotional State, meaning how you felt when placing the trade. Perhaps you were enduring some hard period in life that made you more likely to make mistakes?
Mistakes are important to include as well.
Great moments are often forgotten but should be included too. You don’t want your journal to become overly dreary.
5. Revisit Previous Entries
You should revisit your previous entries on a regular basis. You will soon gain valuable insights to your own trading. Use these to improve on your weaker sides, and you will become a better trader with time!
The daily timeframe indeed is a great timeframe for anyone attempting to profit in the markets. And although it might not be the most alluring of all timeframes out there, it indeed is one of the best!
If you want to start trading daily bars, we recommend that you take a look at our complete guide to swing trading. There we go through some of the things covered in this article, but in much greater detail.
However, if you’re interested in a more advanced trading form with even better profit potential, you definitely should check out our article on algorithmic trading! Algorithmic trading is on the rise, and indeed is the trading form of the future!