Trading Time Frames
Why time frames matter,
One of the most common mistakes made by those just learning to trade is picking a bad time frame to trade on and ignoring the trend and support and resistance levels on other time frames. The most common time frames used by retail Forex traders are 1 day, 1 hour and 5 minutes. On a daily chart each price bar (or candle) represents the price change in one day giving the day's opening price, highest price, lowest price and closing price. An hourly chart gives the same data for each hour and a five-minute chart likewise gives the same information every five minutes. If you are trading using charts it is important to pick a suitable time frame to trade on and equally important to pay attention to other time frames.
Randomness,
As a general rule, the shorter the chart's time frame the more random the data and the more likely the trader trading it is to lose. Even when the market is clearly trending in one direction, your odds of successfully predicting the direction of the next candle are little better than 50/50 on a very short time frame. For example, look at these daily and hourly candlestick charts of the value of the Euro vs. US Dollar (EUR/USD) as the market is today. –
Notice how there are often periods where the market is moving in a clear direction with clear support and resistance levels on the daily candlestick chart.
Notice how the movements appear to be far more random with almost no solid levels of support or resistance on an hourly candlestick chart.
There are without doubt some traders who do make money scalping and trading 1, 2, 5 and 10 minute time frames, however the vast majority (I'd guess about 98%) of traders trading on these time frames lose. There is certainly no time frame that can guarantee you will succeed, but nevertheless, if you're trading on tiny time frames without paying attention to the bigger picture and the longer term trend and support and resistance levels your odds of failure skyrocket.
Trends on different time frames,
When the market is trending in one direction on one time frame, and another direction on another time frame, it is likely that the trend on the longer time frame will 'win'; that is, the longer term trend will usually remain whilst the trend on the shorter time frame is likely to change and move in the same direction as the longer term trend. Therefore, when you take a trade on your chosen trading time frame, you should first check that the longer term trend is also moving in the direction of your trade. One system available for free on the Internet that does this is the 3 ducks trading system. The 3 ducks trading system involves taking a long trade whenever a candle on the five minute chart closes above a 60 period Simple Moving Average providing the 1 hour chart is also above it's 60 hour SMA and the 4 hour chart is also above it's SMA 60, and vice versa for short trades. This system seems to work. I believe the reason it works is because it involves only taking trades in the direction of the larger longer term trend with the five minute chart being used for exact entry and exit timing. If the system didn't confirm the trade's direction on the 1 hour and 4 hour charts, and only used the data on the 5 minute chart, then I don't believe the system would be profitable as five minute candles are so random.
Support and resistance on different time frames,
Like trends, support and resistance lines that hold for weeks and months on a longer term chart are far more significant than the support and resistance levels that appear on charts with tiny time frames. False breakouts of minor support and resistance lines are often faded by large traders when the price on the shorter time-frame is moving against the main trend and they see this as an ideal time to enter the market. Before taking trades on your chosen time frame it is therefore very important to check where the key support and resistance areas are in the larger time frame charts showing the bigger picture.
Trading costs,
Trading costs money either paid through the spread or the brokers commission, you cannot really trade for free. The shorter the time frame you trade on the less time the trade is likely to be held for and the smaller the number of pips you're going to win. For example, say your Forex broker had a spread of 2 pips and you traded using five-minute charts winning an average of 20 pips on a winning trade and losing an average of 20 pips on a losing trade. With such small numbers your commission would be 10% of your winnings and your loses would be 10% bigger. An average win in this example would therefore be 18 pips with an average loss being 22 pips. With these commissions and these trades you would have to be right at least 55% of the time just to break even! The shorter the time frame the more you have to trade, and the more you trade the more expensive your trading becomes.
In Summary,
The shorter the time frame the more random the price, it's very difficult to predict the direction of the price on to short a time frame - although short time frames are often very useful for picking exact entry and exit levels.
The shorter the time frame the weaker trend and the levels of support and resistance on the chart; it's very important to ensure that you are trading in the direction of the longer term (and stronger) trend, and to check key support and resistance levels.
Trading costs can seriously eat into your profits if you're trading on to short a time frame averaging a profit of just a few pips per trade.
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