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2024/06
How to use time frames to increase your trading profits
The time frame refers to a specific period during which the price behaviour is displayed on the chart. The time frame is the period traders use when observing price charts on MT4 trading software.
The periods on trading software generally include a 1-minute chart (1M), 5-minute chart (5M), 15-minute chart (15M), 30-minute chart (30M), 1-hour chart (1H), 4-hour chart (1H), daily chart (D1), weekly chart (W1), and monthly chart (MN).
First, let’s define the time frame briefly. It is an independent period with a 4-5 times difference, such as a month having 4 weeks, a week having 5 trading days, a day having 6 intervals of 4 hours each, an hour having 4 intervals of 15 minutes each, and so on.
This leads to time frames like weekly, daily, hourly, and 15-minute intervals. If the hourly chart is used as the core trading time frame, the previous level can be referred to as the daily chart for the larger time frame, and the 15-minute chart can be referred to as the smaller time frame.
Characteristics of Different Time Frames
(1) The larger time frame controls the smaller time frame; if the larger time frame is not completed, the smaller time frame will not end.
This is equivalent to the larger time frame being the overall strategy, while the smaller time frame represents the specific path. In other words, if the daily trend still needs to be completed, the hourly trend will continue in the direction of the daily trend.
(2) The trends of smaller time frames are summarized into those of larger ones.
If the trend of the smaller time frame is abnormal, its intensity and strength of movement may indicate changes in the larger time frame in advance. If the smaller time frame shows a robust trend opposite to the larger time frame, and the trend is strong, manifested by slope, candlestick strength, and temporal persistence, it may lead to a trend reversal.
When the directions of the larger and smaller time frames are inconsistent, such as conflicts between weekly and daily charts, the following phenomena generally occur:
- Oscillation is equivalent to a battle between the larger and smaller time frames, resulting in no trend on the chart.
- Adjustment in the next level is followed by a continuation of the original trend after adjustment, that is, in the direction of the time frame of the current level. This is when the trend resumes and becomes our current trading cycle’s entry or add-on point.
- Triggering a larger-scale adjustment, leading to a change in the trend of the trading cycle itself. If a breakthrough fails or progresses unfavourably on the smaller time frame chart, it often serves as an entry point for the previous level.
- Finally, it directly causes a reversal of the trend of the larger time frame. These adjustment points often have specific characteristics in time and space, and we need to remain sufficiently vigilant at some critical time and space nodes.
Making Good Use of Multiple Time Frame Analysis
Multiple time frame analysis studies the same market trends in different time frames. Zhang San may see a downtrend on the candlestick chart for the 4-hour chart, but Li Si may see the trading variety fluctuating up and down on the 5-minute chart. And both of them could be correct.
This raises a question. When analyzing the 4-hour chart, the chart may signal a sell-off, but when observing the hourly chart, it may be noticed that the price is slowly rising, which can easily confuse traders. Learning how to use multiple time frames for trading is essential.
Beginners often want to get rich quickly and may choose smaller time frames, such as 1-minute or 5-minute charts, for trading. However, they may feel helpless during trading because it is unsuitable.
Some traders may feel most comfortable trading on the 1-hour chart. The time range of the hourly chart is longer but not too long, and there are fewer trading signals, but not too few. Trading in this time frame will give them more time to analyze market trends.
So, what is the most suitable trading time frame? It depends on the trader. Of course, when starting to trade, traders should not limit themselves to a specific time frame; they can start with the 15-minute chart and then look at the 5-minute chart. Of course, they can also look at the 1-minute chart, daily chart, and 4-hour chart.
This kind of trial and error is widespread for beginners until they find the trading time frame that suits them best. This is why many experienced traders suggest that beginners start with simulated trading; they need to use this method to find the time frame that suits them best.
If a trader prefers to deal with things at a slower pace and always responds calmly in each trade, a longer time frame trading may suit them. Or, if a trader prefers excitement and a fast in-and-out trading style, then trading in the 5-minute chart may be appropriate.
Choice of Different Strategy Traders
Trading strategies are divided into intraday trading, swing trading, and trend trading based on the length of holding time. The holding time is closely related to the time frame used for trading.
Generally speaking, the longer the holding time, the larger the time frame used; the shorter the holding time, the smaller the time frame used. Long-term, medium-term, and short-term are the usual standards for dividing holding time.
For intraday traders, positions cannot be held overnight because holding overnight means the risk is out of control, and the account faces considerable risk exposure. Intraday traders will close all positions on the same day regardless of profit or loss. They generally choose 5-minute chart, 15-minute chart, 30-minute chart, and 1-hour chart.
For swing traders, they need to analyze the medium-term trend of the market, analyze the price pattern, and then judge the timing or position for opening and closing positions. Because they must judge the medium-term trend, traders must see the chart’s price data for at least the last few weeks. Therefore, they must choose a 1-hour chart, a 4-hour chart, and a daily chart.
Trend traders they need to judge the market’s major trend by observing the long-term trend of prices. Therefore, the charts they need to observe should include price information for at least one year or more.
Fundamentals often determine long-term trends, and significant events such as changes in interest rates, US elections, and Brexit are frequently turning points for trends. Therefore, the information on the chart should reflect the impact of significant events on exchange rate prices. Trend trading requires considering the more important historical background, so traders generally choose a 4-hour, daily, and monthly chart.
Some ultra-short-term traders, such as scalp traders, may choose shorter time frames, such as the 1-minute chart. The characteristic of scalp trading is that as long as the profit from the order can offset the spread, the position can be closed without needing a large profit margin, so the holding time is often very short, sometimes only a few seconds.
Furthermore, many traders do not just look at one time frame when trading; they often switch between several time frames to comprehensively assess market trends and signals, making decisions based on this approach, known as “multiple time frame analysis.”
For example, some intraday traders often start by looking at the 1-hour chart to determine the market trend, then switch to the 30-minute chart to reevaluate the market direction or price patterns, and then switch to the 5-minute chart to find suitable entry points. Traders will only enter positions when all trading conditions are met.
For beginners, it is recommended that they consider swing trading or long-term trading, focusing on larger time frames rather than engaging in intraday or short-term trading. These types of trading are challenging, and making profits is almost impossible for newcomers to the forex market.
