Having perspective is important in trading. When the ups and downs of an asset's price are important to you on a minute-by-minute basis, you will probably be involved in the chart's small movements, but if you are more interested in the price changes during a week, the minute-by-minute trends are not so important. That is where time frames come into play in trading. They determine the analytical strategy view of your trading and play a significant role in technical analysis. Here's what you need to know about time frames in charting and how to use them.
A time frame is a period in which price changes occur. That can range from a few seconds or minutes to a few weeks. For example, when you track the price movement of an asset within minutes, you are using minutes as a time frame.
There are several time frames, from one second to yearly or several years, but the most important & common time frames are:
Using time frames in trading is essential to help you decide on the strength and direction of trends because a time frame is a period during which you conduct your analysis based on time as a guide to analyzing. The point is to determine whether there are significant trends during a given time frame. If your time frame is daily, minute-by-minute movements are less important.
The time frame you use depends on the assets and symbols you trade. For example, the best time frame for forex trading can be different from the best time frame for stock trading because the trading hours of the two markets are different. Even in the forex market, the best time frame for trading may differ between currency pairs, e.g., some currency pairs do not give good fluctuations in a short period of one minute, so the scalper trader may trade in some currency pairs in five minutes instead of one minute time frame.
Additionally, the time frames you use will also vary based on the type of trading strategy you use. For example, a swing trader's trading time is longer than a day trader's. In contrast, a day trader does not hold a position for more than one day. Since they intend to make several trades per day or hour, they may choose time frames of 15 minutes or less. The goal is to use timeframes that fit your trading strategy.
Read more: What is a Trading Strategy? The steps of creating a Trading Strategy
Another point in choosing a time frame is how to manage trader capital. Usually, higher time frames have a greater distance between the entry point and the exit point of the trade, but in smaller time frames, the Stop Loss is much less. On the other hand, the shorter the time frame, the higher the possibility of analysis error. As a result, one of the factors that one must carefully consider in choosing the time frame is capital management method and trading volume.
By juxtaposing timeframes with other metrics, such as support or resistance areas, breakout points, and price patterns, you are likely to get a better idea of an asset's price trend.
As mentioned, the best time frame for traders differs according to the trading strategy, the symbols they trade the most, capital management, and how to use the time frames. But the trading strategy is the most important factor in choosing the time frame.
Scalper uses a short time frame. The purpose of scalpers is usually to detect movements every few minutes. They tend to use time frames of 1 to 15 minutes. The best time frame for scalping and most used by scalpers is 1 to 2 minutes.
Significant points in scalp trading:
Read more: Technical Analysis in Forex & Types of Technical Analysis
Using 15-minute time frames is helpful for day traders because they aim to enter and exit several times a day. One can identify the main market trend using 60-minute or 4-hour time frames, then 15-minute time frames are used to analyze short-term trends.
Significant points in day trading:
The objective of swing traders is to invest in short and mid-term trends. The best time frame for swing trading is the 4-hour time frame. Four-hour charts can be used with longer time frames in conjunction, usually daily, to create an overall view of the trend.
Significant points in swing trading:
Read more: Fundamental Analysis in Forex
The best time frame for position trading is when the focus is on long-term trading. The point of position trading is to find an asset whose value is likely to increase and maintain that trend for a longer period. Therefore, the best time frame for this type of trading is usually daily or weekly. Generally, you can look at daily prices and then get an overview by looking at price changes over several weeks.
Significant points in position trading:
Trends can exist simultaneously. Focusing on a single time chart will cause you to miss a lot of information that may be useful for your trading type. Combining time frames with other metrics, such as support or resistance levels, breakout points, and price patterns, may give you ideas. You will get a better view of an asset's price trend. On the other hand, a multi-timeframe strategy allows you to focus on the most significant time frame of the asset you are trading, but also consider other periods. For example, a swing trader can have short-term time frames as his main focus, but must also consider the Main (longer) and Secondary (average) market trends. In higher time frames, one should search for the main price levels and the trend determination, and in lower time frames, according to one's strategy, one should look for the least risky entry point. That is why professional traders use several trading time frames or multi-time frames. They try to discover the best possible points for the trade.
In the combination of time frames, the best possible time should be combined that is reasonable in terms of distance, e.g., it is not possible to determine the daily chart of the trend and enter the trade in the one-minute chart.
You can get an overview of asset price trends and make the right decision based on your trading strategy by using multi-timeframe analysis.