An Overview of Time Frames and their Characteristics

  • Print Article |
  • Send to a Friend |
  • |
  • Add to Google |


Trading, just like life, is basically dependent on how approach it, fast and furious or more laid back. This is certainly true with choosing the time frames for your trading analysis as with every other trading aspect you got to get it right and be comfortable. The single most important criterion for choosing the right time frame for you is to look at how you want you're trading to fit in with the rest of your life. In other words, it depends on your individual personality and the time you have available. Some personalities like to take things gently and slowly, while for others, no less than a fast-paced, adrenaline-pumping frenzied trading environment will do. In general, fast-paced traders do well with short time frames such as one-minute and five-minute charts. What we are aiming for in this article is to provide you with some basic insights regarding the characteristics of the different time charts and their advantages and disadvantages.

Long term time frames

What are they? These are the daily and weekly time frame charts. They plot the data over a longer term and provide a bigger picture of the market trends and general condition. They are generally used in conjunction with shorter time frames which can be used as entry or triggers, but the longer time frame will give you an accurate reflection of the market trend.

You can see which way the market is going so you can go with the flow, or stay out if it looks like it has run a long way already. The trades identified from daily or weekly analysis have a lot longer life cycle, IE they may run as open trades for weeks on end.
Some trades traded on weekly charts can run for 12 months if the market condition continues in the same direction.

Advantages: One of the advantages of using daily or weekly charts is that the markets do not need to be constantly monitored; in fact, it would be unusual if they were monitored several times during a day. The trends are viewed on a much larger scale. Since there are fewer transactions being made, there are also fewer payments for spreads and the trading costs tend to be small in comparison to the size of the win or the loss. One can also think things through with regards to strategy and planning, because the pace is slower.

Disadvantages: In these trades, the swings are large, and the account has to be larger in order to be able to ride the long moves out. Because there are fewer trades, higher amounts are invested. This results in either higher risk or a lower return, if lower risk is applied, since the trader can lose a lot of money with just a single transaction, it tends to be large accounts that are looking over a longer time frame for results, like a fund or bank, where 8% a year is acceptable.

Much patience is also required because of the fewer trading opportunities, and because a trade may be losing for a few months, before closing out or turning around.

 

 

Short term time frames

What are they? The shorter time frames are where the bars of data are calculated over shorter periods like 60 minute or the one hour bar, fifteen minute and five minutes bars are short term and of course the one minute bar is the baby of the bunch. They display the price action differently and each has advantages and disadvantages as discussed in previous articles.

Advantages: Compared to long term trading, there are more trading opportunities available. There is more frequency of trading signals, which adds the opportunity of compounding a lot of trades together over a short period of time; this gives you more chance to create a large return on your capital, as you are not dependent on one or two trades a week winning.
This also lessens the risk of losing a huge amount of money with a single trade. You can take a smaller risk on each individual trade yet trade multiple trades.

Disadvantages: The costs for trading will be higher due to the increase in frequency and trades are shorter in time and the size in pips of the result are smaller, increasing the impact of spread or commissions You tend to be at your computer more often so it is more intense. As you are trading a lot it allows you stray away from your core strategy, so discipline is important too, and most people who trade find discipline and psychology difficult to control.

Traders typically combine a couple of different time frames to cover the market action from the long term, medium and short term time frames. Maybe the advantages and disadvantages can cancel each other out.


Intraday

What it this? This is a term that is mainly used in share markets where the market has a definite opening and closing time in each country, Intraday trades are trades that are opened and closed during the same session.
In FX a lot of trades are short term so the term is relevant but is not used when applied to FX traders as much.

Multiple Time Frames
Combining longer time frames with shorter time frames on one chart is a simple process.
You can skip from chart to chart to see the short medium and long term conditions or movements. A better approach is to pick an average you like say a 10 period simple moving average and add this to your chart.
Then using the multiple of the next chart timeframe you want to use upwards. Example: If you use a 5 minute chart and are also interested in a 15 minute chart, where the difference is three times 15 minutes is 3 times greater than 5 minutes, so you can multiply the 10 period simple moving average by three to add a 30 SMA to the 10SMA. Your chart is displaying the 10 period SMA on a 5 minute chart with a representation of a 15 minute charts 10 period SMA to show the longer term time frame.

A really good example of this is the Wealth FX Gold Line strategy that combines this technique only uses three indicators a 5, 15 and 60 minute chart or a 1, 5 and 15 minute chart.

Advantages: You can see the short or local prices, an average of those prices and also a representation of the average of the next major time frame up so you can see the actual ‘now' price action and the real market direction based on the price and its relationship to the longer term average.
If the price is above the longer term average we are in a rising market and of course if the price is below the average the market is in a downwards direction.

There are even more opportunities for using different averages to identify the true movement both of the price and the averages.

Disadvantages: using longer time frames on shorter charts can cause you to be convinced that a certain condition is happening, like if the price is well above the longer term average, so the price must be going up, does this mean we are buying at the top though, which is the classic buying when the price is overbought. Sometimes you miss opportunities as you wait for longer technical signals to play out on shorter time frame charts. Delays in signals can mean you miss opportunities or enter later than you would on the short term signal.


All in all, your capital is part of the consideration you make when you trade. For the shorter time frames, the stop losses are tighter and you can make a better use of your margin. For the larger time frame, bigger stop losses are required; therefore needing bigger trade sizes and account sizes are in order to make reasonable amounts of money.

Your personal preference is also important. But if you need a personal suggestion, when using one-minute chart it is recommended you add additional longer term averages, to help with the real market direction, shortest term conditions can be monitored and triggers on the local faster bar make for effective execution of trades.

You owe it to yourself to try it out on your FX account and see if you can reap the benefits trading different time frames offer. It also better hones you into a more experienced trader as you do age quicker and get more screen time and experience using a shorter time frame and once you are blooded you can move up to longer time frames.

Experience in different trading time frames is all part of the journey and it can help you become a trader who can take on the market anytime with supreme confidence.

 

To know more pls visit complete trading strategy

 

Article Rating (5 stars):
  • article full star
  • article full star
  • article full star
  • article full star
  • article full star
Rate this Article:
  • Article Word Count: 1457
  • |
  • Total Views: 26
  • |
  • permalink
  • Print Article |
  • Send to a Friend |
  • |
  • Add to Google |
>