Which time frame to trade on

The difference between time frames

Japanese candlesticks: an introduction to the idea that a price chart is always shown on a particular time frame. This can range from as low as a 1 minute chart, where the candle is formed every minute, to monthly charts where the candle forms once every month.

It is important to stress that when you set a particular time period on your chart, it does not show the price over that time period. Rather, each individual candle takes that specified time to form.

For example, a five minute time frame does not show the price action over 5 minutes, but rather each individual candle on the price chart takes five minutes to form.

When looking at a price chart, a larger time frame, such as weekly chart, will show the price range over the course of a number of months, but each candle will take a day or a week to form.

Definitions of different time frames

Opinions differ on what defines a short-term time frame and a long-term time frame.

However, a good place to start in order to differentiate between different time frames is to consider that anything below an hourly time frame can be considered short-term; anything below a daily time frame can be considered medium-term; and anything that is daily and above can be considered long-term.

Choosing a time frame

A trader does not need to monitor every single time frame in order to be successful. A time frame should match the personality of a trader because there are different disciplines and techniques for different time frames. Someone with a lot of patience that prefers to trade the markets without high volatility may prefer trading on higher time frames. Someone who prefers to trade frequently with heightened market activity may prefer a shorter term time frame. No two traders are alike and a trader should choose the time frame that suits them best.

Short-term time frames

The duration of short-term trades generally lasts from several seconds to a couple of hours at most.

Scalping

A method in which a trader monitors a short-term time frame closely and enters and exits in a matter of seconds is known as scalping. The main objective is to make small but frequent trades.

There are several considerations that should be taken into account when choosing scalping as a trading method:

1. Scalping is very fast paced and requires a significant amount of attention throughout the day to find and take trades.
2. Complete attention is also required throughout the trade from open to close.
3. Scalping requires active market sessions. This is most frequently during the London and New York sessions.
4. It can be stressful and requires discipline to continually stick to a scalping system.

It is important to note that scalping does not guarantee a trader positive returns just because potential profits can be made quickly.

Day trading/Intraday trading

As the name suggests, day trading is a method where orders are opened and closed within a single day and the position is not carried overnight. Trading can take place in five minutes, fifteen minutes, hourly etc. However, day trading usually results in a few trades per day.

It does not rely as heavily on fast price action, such as scalping. The following aspects belong to day trading and should be considered before choosing it as a preferred method:

This method is slower than scalping, but not as long as other longer term types of trading, where you could wait for days or even weeks to find an entry.
A day trader should keep an eye on relevant economical developments as these can change the market conditions throughout the day.

Medium-term time frames

On medium-term time frames, a trader will watch four-hour or daily charts and will attempt to look at the overall picture, while potentially only finding a few trades per week.

Swing trading

A swing trader is a medium-term trader who may look at a daily chart to see underlying trends and decide on specific trades based on, say, a four-hour chart. Positions are generally held from a day to a few days.

With swing trading, stop losses and profit targets are generally higher. A swing trader needs patience and discipline to wait until the price reaches their take profit or stop loss orders.

Swing trading would suit those who:

Cannot monitor the market every day, but can dedicate at least some time to market analysis for finding entries.
Are patient in waiting for the correct entries, which may mean only trading a few times per week.
They trust their trading plan and do not change it every time there is an adverse price fluctuation.
A benefit of swing trading is that with larger targets, spreads have little impact. For example, a 3 pip spread is very affordable when projected profits are 50-100 pips. This also means that as a swing trader, you have a wider choice of currency pairs, including those that are less liquid with wider spreads.

Long-term trading

A long-term trader waits patiently for opportunities. The trades can be rare and are usually held for long periods of time – sometimes weeks, months or even longer.

Position trading

The method where daily, weekly and monthly charts are predominantly used is called position trading. Fundamental analysis can play a key role in making trading decisions because economic conditions may change over the time for which a trade is open.

However, technical analysis is extremely reliable on long-term position trading because many traders that trade large amounts of money use technical analysis to enter and exit trades, including financial institutions, commercial and central banks.

Position trading would suit traders who have:

1. A lot of patience to enter and exit a trade.
2. Discipline to refrain from changing the initial plan and are prepared for big price swings.
3. Larger starting capital because a long-term trading account generally has to be able to withstand larger losses.