Forex Trading: How To Choose Your Timeframe

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Takeaway: If you have developed a set trading style, then choosing your time frame becomes a simple task.

Forex Trading: How To Choose Your Timeframe
Source: Flickr/Alan Cleaver
If you are using a chart to trade forex, you are likely already familiar with the difficulties of choosing a time frame. In this article, we’ll look at why time frames are so important in currency trading and give some tips on how you can choose the right one for your trading style.

Trading and Time Frames

If your trading is mostly (or entirely) based on technical analysis, then the time frame you choose quite literally changes your trading. Technical signals and formations change according to the time frame used. A shorter time frame like a 1 minute chart or a tick chart will produce more signals than a 1 day or 1 week chart. This is because a larger time frame smooths price action to the point where smaller signals and formations are simply left out. Taking it up another level, a 1 month chart smooths price action to the point where intraday signals and formations are excluded, leaving only trends and formations that last for multiple days.

It is important to remember that the hectic action of a tick chart is no better or worse than the smoother-looking monthly chart. Both are tools that serve a particular type of currency trader.

Multiple Time Frame Analysis

Before we dive deeper into what type of chart fits what type of trader, it is important to note that most forex traders use multiple time frames for analysis purposes. This means that, even if a trader uses an hourly chart to enter, exit and monitor trades, he will usually follow the same currency pair on a different time frames while his position is open. Generally, the additional time frames will be in shorter increments than the trading time frame.

The purpose of multiple time frame analysis is to spot important technical shifts sooner rather than latter. If our trader using an hourly chart is also watching a 30 minute and 5 minute chart, he will have multiple chances to spot a reversal and confirm it before it appears on the 1 hour chart. So, when we are talking about time frames for the rest of the article, we’re talking about the main trading time frame while understanding that other time frames will also be used for analysis purposes.

Matching Trading Styles and Time Frames

Generally speaking, if a trader has a set trading style, the time frame he or she trades will be dictated by the trading style. A long-term trader is on the look out for trades that he can hold for days or weeks until the primary trend is exhausted. This means that watching a tick chart will yield very little useful information. The opposite is true for a short-term trader. If a trader is looking to scalp pips intraday, a daily or weekly chart is useless. So if you know your trading style, some commonly-used time frames automatically suggest themselves:
  • Scalpers: Scalpers are the shortest of short-term traders. A scalper will rarely be holding a position longer than a 30 minutes, so any chart above a 15 minute chart holds little appeal. A scalper will usually focus in on 1 minute charts and tick charts, but 5, 10 and 15 minute charts may also be analyzed to identify other opportunities in the market.
  • Day traders: A day trader generally gets in and out of a trade within a single trading day. This means that, although a daily, weekly or monthly chart may be used to track larger market trends, the real trading is done on 1 hour, 30, 15, 10, 5 and 1 minute charts.
  • Swing traders: Swing traders are a hard group to define because they can hold a position long-term like a fundamental trader or be in and out like a day trader if the market turns. Of all traders, swing traders usually watch the most time frames, including daily charts, 1 hour charts and, depending on the situation, even the 30, 15, 10 and 5 minute charts. Swing traders will also monitor weekly charts to see if any longer term opportunities are emerging.
  • Fundamental traders: Because economic releases and macroeconomic trends are the primary data sources for fundamental traders, they generally stick to weekly or monthly charts. If they want to time entries and exits, they may also watch the daily and hourly charts before opening or closing the position.

Custom Time Frames

With trading software, you can actually choose any time frame that tickles your fancy. If you want to trade using a 3 day chart or a 19 minute chart, no one is going to stop you. That said, using the same time frames of other traders is usually a good idea because it means you are looking at the same signals and the same data, so you’ll be better equipped to foresee market reactions and position yourself accordingly.

Making Your Pick

Knowing your trading style makes picking a time frame simple. If you are just starting out, however, it can be useful to try out different time frames and styles until you find the one that suits you. Thanks to demo accounts, you don’t even have to put up your own money while you test drive time frames. If a weekly chart has you yawning, move to a shorter time frame. If tick charts make you anxious, move up to hourly or daily charts. Pardon the pun, but it is well worth your time to find your ideal time frame. (For further reading, check out 7 Tips for Successful Forex Trading.)

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About Andrew Beattie
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Andrew Beattie has spent most of his career writing, editing and managing financial content as well as more general web site material in all its many forms. He is especially interested in the future of search and the application of analytics to the business world. He has been a long-time contributor to Investopedia.com and is currently venturing forth on ForexDictionary.
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