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Wednesday, March 5, 2014

Technical Analysis, Technical Indicators, Time-Frames

There are different periods in which a currency pair could be charted: monthly, weekly, daily, hourly, 30-minute, 5-minute, etc.
Each timeframe has its unique trend; this is the reason why there is no absolute trend for any currency, take the following charts for example.
EURUSD Hourly Chart
Time Frames - Hourly Chart
[Chart 30]
EURUSD Daily Chart
Time Frames - Daily Chart
[Chart 31]
In these charts, a swing trader focusing in the 1H chart could assess: well there is no trend (ranging market) right now for the EURUSD while a long-term trader could assess: the trend for the EURUSD is clearly up. Which trader is wrong? No one, both of them are correct. Both of them have effectively determined the trend in the timeframe they are focusing on.
Of course, the market condition in the 1H chart is most likely to continue for the next couple of days while the market condition in the daily chart is likely to continue for the next month or so.
The same goes when we use indicators. Sometimes the same indicator could be signalling the opposite signals on the same currency pair on different time frames.
Take for instance the following charts:

GBPJPY 15 Minute
GBPJPY 15 minute Chart
[Chart 32]
GBPJPY 4H
GBPJPY 4 Hour Chart
[Chart 33]
On the first chart (15min) the stochastics are in an oversold situation however, at the same time, in the 4H chart the stochastics did give a sell signal (crossing from the overbought territory to the neutral territory). The reason for this simple, remember all indicators go back n-periods to make a calculation, in this particular case, the 7 period stochastics in the 15 min chart went back 8 candlesticks to complete its calculation (1.75 hours). The stochastics in the 4H chart also represent 8 candlesticks but those 21 candles represent around 1.5 days worth of data. The market conditions are completely different during those periods.
Obviously, it is better to trade when many timeframes indicate the same market condition (i.e. both, the 15 min and the 4H chart indicate an oversold condition). When this happens, the probability of success of the given signal increases enormously.
Is important to realize that the longer the timeframe the more impact it will have in the market. For instance, an oversold condition in the 4H chart is more important than an overbought condition in the 15 min chart. More important because the “signaled market condition” will last for a greater time in longer time frames than in the shorter time frames.

Which timeframe should I use?
When trying to decide which timeframe to trade in we must take in consideration two important factors: the time dedicated to your trading and your personality.
How much time a day/week are we going to dedicate to our trading? Obviously if you have a day job and do not have the possibility to monitor your trades, then it would be better to focus on the 4H or 1H chart, and even daily charts can work out. If there is a possibility to monitor your trades then you can use the 30 min charts.
On the other hand, if you are a full time trader, then you have the possibility to trade shorter timeframes such as the 5 or 15 min charts.
However, we must almost consider that when you are a full time trader there is a chance that trading shorter timeframes does not fit your personality. The same goes for traders with a day job, there is a possibility that trading the longer term just will not work. I have a friend who started trading the FX market using the 1min chart. His trading wasn’t going the way he expected so he moved to the 15 min, then to the 30 min and finally to the 1H charts, where he felt most comfortable trading (and of course profits also increased).

So to summarize, you should use the time frames that better fit your personality and time requirements, and the best way to know which one fits you better is by trading as many time frames as possible, then choose the one you felt most comfortable with.

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