In the book “Markets in Profile: Profiting from the Auction Process” by T. Jones and James F. Dalton, the authors explain how different traders operate on different timeframes and how these timeframes affect market movements. It can be confusing at first, but understanding these concepts can help you make better trading decisions. Let’s break it down in simple terms.
What Are Market Timeframes?
Markets aren’t just made up of one type of trader. Traders operate on different timeframes, and this influences how the market behaves. Imagine you’re on the National Stock Exchange (NSE). There are traders who make decisions based on minutes, hours, days, or even months! Understanding who these traders are and how they act can help you spot opportunities and manage your own trades better.
Here’s a look at the different timeframes and types of traders:
1. Scalpers: The Quick Movers
Scalpers are traders who make super-fast trades, sometimes within minutes. They try to take advantage of small price changes and often make hundreds of trades in a single day. Imagine them like someone quickly buying and selling something at a busy street market. Their decisions are based on order flow—meaning they watch how many people are buying or selling at any given moment.
For scalpers, fundamental information (like company earnings or market news) is too slow. They focus only on how many people are placing buy and sell orders. It’s like someone saying, “I don’t care why people are buying; I just want to sell to them while they’re still interested.”
2. Day Traders: In and Out in a Day
Day traders are a bit like scalpers but with a slightly longer horizon. They make trades throughout the day, looking to take advantage of market swings caused by news, technical analysis, or large institutional moves. However, they close all their positions by the end of the trading day.
Day traders keep track of a ton of information, like market news, stock charts, and even government policies, because all these factors can influence short-term price movements. Picture a day trader as someone keeping an eye on everything, trying to make sense of all the noise to make quick but informed decisions.
3. Short-Term Traders: A Few Days to A Week
Short-term traders hold trades longer than a day but not usually longer than three to five days. Their goal is to buy low and sell high within this short period, paying close attention to price patterns and market trends. These traders also pay more attention to news and fundamentals compared to scalpers and day traders.
For instance, if they notice a stock price dipping for a few days, they might buy in with the expectation that the price will bounce back soon. Their strategy relies heavily on watching price charts and waiting for the right moment to enter and exit.
4. Intermediate-Term Traders: Weeks to Months
Intermediate-term traders are sometimes called swing traders. They hold their positions for several weeks to months. These traders are looking to take advantage of the larger swings in market trends, riding the ups and downs within well-defined price ranges. They use a mix of technical and fundamental analysis to make decisions.
An intermediate-term trader, for example, might buy a stock that’s been trading in a certain price range on the NSE. When they see the stock reach a low point in that range, they’ll buy, expecting the price to rise within the next few weeks.
5. Long-Term Investors: Months to Years
Finally, long-term investors are in the market for the long haul. They hold their stocks for several months or even years. These investors don’t care about daily price swings. Instead, they focus on the bigger picture, looking at the company’s fundamentals, like earnings growth, market position, and industry trends. When these investors buy, it’s usually in large quantities, and they may hold onto their investments for years.
For example, a long-term investor on the NSE might buy shares in a well-established company, confident that its value will grow over the next few years. They don’t sell at the first sign of a price drop because they believe in the long-term success of the company.
How Timeframes Work Together
Now, when you look at the market from a longer-term perspective, you’ll start to see how all these different timeframes—scalpers, day traders, short-term traders, intermediate-term traders, and long-term investors—coexist and interact over time. Even though each group has its own style and approach, their actions influence one another, and together they shape the bigger market trends.
Here’s how it works:
1. All the timeframes can act in unison, pushing the market into a longer-term upward trend. When all types of traders are buying, you see a strong move in the market.
2. Over time, the longer-term trend may reach a peak as the market goes through a process of finding balance. At this stage, the longer-term investors continue to provide support by buying, while day traders and short-term traders help facilitate buying and selling (an auction process) on both sides. This allows the market to settle at a higher value.
3. Once the market finds its balance, the longer-term buyers may step in again, auctioning prices even higher, and the longer-term trend continues upward.
Visualizing the Timeframes Together:
• Imagine the long-term investors as the anchor of a ship, steady and supportive over time, while the scalpers and day traders are the waves, constantly moving and creating smaller changes.
• When the market is calm and balanced, it’s because all these timeframes are working together, facilitating the process of price discovery and equilibrium.
• As the market stabilises at a higher level, it’s like a ship finding calm waters after being steered through turbulent conditions.
Final Thoughts
Understanding these different types of traders and their timeframes helps you see how the market really works. You don’t need to be all of them, but knowing their motivations and actions can help you plan your own trades more effectively. Instead of reacting to every small price movement, focus on finding your own trading style and timeframe that fits your goals and personality.
-Happy Trading