Which Timeframe Should I Trade?
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Which Timeframe Should You Trade?
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.
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 10-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. His name is Warren Buffet. You might know him.
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:
- Long-term
- Short-term or swing
- Intraday or day-trading
Which one is better? It depends on....
Timeframe Breakdowns
Which one is better?
It depends on your personality!
Let me give you a breakdown of the three to help you choose:
Timeframe | Description | Advantages | Disadvantages |
Long-term | Long-term traders will usually refer to daily and weekly charts. The weekly charts will establish the longer term perspective and assist in placing entries in the shorter term daily. Trades usually from a few weeks to many months, sometimes years. | Don’t have to watch markets intraday Fewer transactions means less paying of spreads
| Large swings which require large stops Usually 1 or 2 good trades a year so patience is required Bigger account needed to ride longer term swings Frequent losing months |
Short-term | Short-term traders use hourly time frames and hold trades for several hours to a week. | More opportunities for trades Less chance of losing months Less reliance on one or two trades a year to make money | Transaction costs will be higher (more spreads to pay) Overnight risk becomes a factor
|
Intraday | Intraday traders use minute charts such as 1-minute or 5-minute. Trades are held intraday and exited by market close. | Lots of trading opportunities Less chance of losing months No overnight risk | Transaction costs will be much higher (more spreads to pay) Mentally more difficult due to frequency of trading Profits are limited by needing to exit at the end of the day. |
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 10 minute chart, telling us to short. What the hell is going on?
Let’s play a quick game called “Long or Short”. The rules of the game are easy. You look at a chart and you decide whether to go long or short. Easy. Okay ready?
5 Minute Chart
Let’s a take a look at a EUR/USD 5-minute chart on 11/03/05 around 4 am EST. Oooh it’s so nice. It’s trading above its 100 simple moving average which is bullish and look! It just broke out and closed above it’s previous resistance! Perfect time to go long right? I’ll take that as a yes.
Oh! You are WRONG! Look what happens next! It’s goes up a little bit but then drops like rock. Oh too bad.
60 Minute Chart
Let’s look at the same exact chart on a higher timeframe. It’s the same date, 11/03/05 and the same time, around 4 am EST.
Holy cow! The pair broke out of its down channel which is bullish. It’s trading above its 100 simple moving average which is bullish. The last candle broke and closed above its previous resistance which is bullish. Looks like a bull, smells like a bull. Nothing but up from here right? You say long.
OOOHHHHH! Zero for two! How do you like your steak cooked? Because from the looks of this chart…the bull got slaughtered. The pair even dropped back into its old down channel. Look at that last candle, it was dropping so much, it couldn’t even stay inside my chart! Amazing!
4 Hour Chart
Okay, we’ve now moved up to an even higher timeframe chart. A 4-hour chart. It’s still the same date and time, just a higher timeframe. If you had looked at this chart first, would you still have been quick to go long on either the 5-minute or 1-hour chart?
It’s currently trading in a down channel which is bearish. The pair is hitting the upper trend line of the down channel which is extremely bearish. Yes, it’s still trading above the 100 simple moving average which would count as bullish, but that channel would still make me cautious. Especially since it’s trading around the upper trend line.
Look what happens! Droppin’ like its hot! The pair stayed true to its channel. It hit the upper trend line and traveled down.
Daily Chart
For fun’s sake, let’s go up one more timeframe to the daily chart.
Wow, will you look at that? The pair is trading in an obvious down trend. It’s below its 100 simple moving average and its in a down channel. On this chart, the trend direction is so obvious! Do you also notice the last candle? It tested the upper trend line and reversed. Not a very good bullish sign. Let’s look at what happens next.
Hallelujah! The downtrend continues!
So what's the point?
All of the charts were showing the same date and time. They were just different timeframes. Do you see now the importance of looking at multiple 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. 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.
Take a broad look at what’s happening. Don’t try to get your face closer to the market, but push yourself further away.
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.
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.
Summary
- You have to decide what the correct timeframe is for YOU.
- Once you've found your preferred timeframe, 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 only trade off on only one timeframe.
- Make it a habit to look at multiple timeframes when trading.
- Choose a set of time frames that you are going to watch, and only concentrate on those time frames. Pick three time frames: 1hr, 4hr, daily; 5 min, 15min, 1hr, and so on. And only use those time frames. Learn all you can about how the market works during those time frames.
- Don't look at too many time frames, you’ll be overloaded with too much information and your brain will explode.
- Stick to two or three timeframes, any more than that is overkill.
- We can't repeat this enough: Get a bird's eye view. Using multiple timeframes resolves contradictions between indicators and timeframes. Always begin your market analysis by stepping back from the markets and looking at the big picture.
- Use a long-term chart to find the trend, and then return closer to the market to make decisions about entries and exits.
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