One of the main reasons traders don’t do well as they should is because they’re usually trading the wrong timeframe for their personality. New traders will want to learn how to get rich quick so they’ll start trading small timeframes like the 1-minute or 5-minute charts. Then they end up getting frustrated when they trade because it’s the wrong timeframe for their personality.
Let me begin here by telling you a story:
Finally after a long period of timeframe unfaithfulness, we felt we were most comfortable trading the 1-hour charts. This timeframe is longer, but not too long, and trade signals were fewer, but not too few. We now have more time to analyze the market and didn’t feel rushed anymore. On the other hand, we have a friend who could never, ever, trade in a 1-hour timeframe. It would be way too slow for him and he’d probably think he was going to rot and die before he could get in a trade. He prefers trading a 15-minute chart. It still gives him enough time (but not too much) to make decisions based on his trading plan. Another buddy of ours can’t figure out how we can trade a 1-hour chart because he thinks it’s too fast! He trades only daily, weekly, and monthly charts.
Okay, so you’re probably asking what the right timeframe is for you. Well, buddy, if you had been paying attention, it depends on your personality. You have to feel comfortable with the timeframe you’re trading in.
You’ll always feel some kind of pressure or sense of frustration when you’re in a trade because real money is involved. But you shouldn’t feel that the reason for the pressure is because things are happening so fast that you find it difficult to make decisions or so slowly that you get frustrated. When we first started trading, we couldn’t stick to a timeframe. We started with the 15-minute chart. Then the 5-minute chart. Then we tried the 1-hour chart, the daily chart, and 4-hour chart.
Trading Timeframes Are Usually Categorized Into Three Types:
1. Long-term
2. Medium-term or swing
3. Short-term or Intraday or Day-trading
Which one is better? It depends on You....
You have to decide what the correct timeframe is for YOU. You also have to consider the amount of capital you have to trade. Shorter timeframes allows you to make better use of margin and have tighter stop losses. Larger timeframes require a bigger account so you can handle the market swings without facing a margin call.
When you finally decide on your preferred timeframe is when the fun begins. This is when you start looking at multiple timeframes to help you analyze the market.
Long or Short?
If you ever look at a currency pair on different timeframes, you probably noticed that markets can move in different directions at the same time. A moving average may rise on a weekly chart, giving a buy signal, but fall on a daily chart, giving a sell signal. It may rally on an hourly chart, telling us to go long, but sink on a 15 minute chart, telling us to go short. What the hell is going on? All of the charts were showing the same date and time. They were just different timeframes.
We used to just trade off 15-minute charts and that was it. We could never understand why when everything looked good the market would suddenly stall or reverse. It never crossed our minds to take a look at a larger time frame to see what was happening. When the market did stall or reverse on my 15-minute chart, it was often because it had hit support or resistance on a larger time frame.
It took me a couple of hundred bucks to learn that the larger the timeframe, the more important support and resistance levels were. Do you see now the importance of looking at multiple timeframes? Trading using multiple time frames has probably made us more money than any other one thing alone. It will allow you to stay in a trade longer because you’re able to identify where you are relative to the big picture.
Most beginners look at only one timeframe. They grab a single timeframe, apply their indicators and ignore other timeframes. The problem is that a new trend, coming from another timeframe, often hurts traders who don’t look at the big picture.
The procedure is for you to select your preferred timeframe and then go up to the next higher timeframe. There you make a strategic decision to go long or short based on the direction of the trend. You would then return to your preferred timeframe to make tactical decisions about where to enter and exit (place stop and profit target). Adding the dimension of time to your analysis gives you an edge over the other tunnel vision traders who trade off on only one timeframe.
There is obviously a limit to how many timeframes you can study. You don’t want a screen full of charts telling you different things. Use at least two, but not more than three timeframes because adding more will just confuse the geewillikers out of you and you’ll suffer from paralysis analysis and go crazy.
We like to use three time frames. The largest time frame we consider our main trend, the next time frame down as my medium trend and the smallest time frame as the short-term trend and our trading chart.
You can use any time frame you like as long as there is enough time difference between them to see a difference in their movement. You might use:
• 1 minute, 5 minute, and 30 minute
• 5 minute, 30 minute, and 4 hour
• 15 minute, 1 hour, and 4 hour
• 1 hour, 4 hour, and daily
• 4 hour, daily, and weekly and so on.
When you’re trying to decide how much time in between charts, just make sure there is enough difference for the smaller time frame to move back and forth without every move reflecting in the larger time frame. If the timeframes are too close, you won’t be able to tell the difference, which would be pretty useless.
