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
[Chart 30]
EURUSD 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
[Chart 32]
GBPJPY 4H
[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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