Utilizing different forex time frames can assist traders to spot the larger trends and more granular price action that may be unfolding. Different viewpoints can be formed when switching between different time frames on the same currency pair and this can either benefit or hinder the analysis. Therefore, it is crucial to have a solid understanding of forex trading time frames from the very first trade.
This is a beginner’s guide that introduces the concept of forex time frames, their challenges, why they are useful, and how they can be implemented.
WHAT ARE THE MAIN FOREX TIME FRAMES?
Forex trading time frames are commonly classified as long-term, medium-term and short-term. Traders have the option of incorporating all three, or simply using one longer and one shorter time frame when analyzing potential trades. While the longer time frames are beneficial for identifying a trade set up, the shorter time frames are useful for timing entries.
Forex time frames
|CLASSIFICATION||TRADING STYLE||TREND TIME FRAME||TRIGGER TIME FRAME|
|Long term||Position trading||Weekly||Daily|
|Medium term||Swing trader||Daily||4-hour|
|Short term||Day trading||4-hour||Hourly|
HOW DOES TIME FRAME ANALYSIS IMPACT FOREX TRADES?
Switching between different forex trading time frames has a number of advantages. These become apparent when viewing forex vs stocks. Due to the sheer liquidity of the forex market, traders can view very short time frames and observe meaningful information whereas, a similar time frame for an illiquid stock may not present any new data points if the price has not changed.
Another advantage in favor of forex time frames includes the 24-hour nature of the forex market during the week. Switching between multiple forex time frames during different trading sessions (Asian,European, US) presents traders with different market conditions that are characteristic to that trading session like ranging markets during the Asia session or trending markets during the European and US session cross over. Traders can capitalize on these different market characteristics by using various time frames to spot ideal entries.
WHAT FOREX TIME FRAME SHOULD BE TRADED?
Many traders new to forex will often wonder if there is a time frame that is better to trade than another. Fundamentally, choosing the best time frame to trade forex will depend greatly on a trader’s preferred trading style and strategies used.
To choose the best time frame, consider what your trading style is and what trading strategy you wish to follow. These should influence the appropriate time frame to be trading on. Thereafter, select atechnical analysis chart that you are comfortable with, conduct thorough analysis, and ensure to implement sound risk management on all trades.
USING FOREX TIME FRAMES THAT MATCH TRADING STRATEGIES
Often, traders can get conflicting views of a currency pair by examining different time frames. For example, while the daily chart might be showing an up-trend, the hourly chart can be showing a down-trend. But which way should it be traded?
This confusion can produce counter-productive unrest in the trader’s mind when attempting to line up trades. Therefore, it’s important for traders to plan the time frames they wish to trade in accordance with their trading strategy.
Swing trading example
A swing trader adhering to a trend following strategy should avoid making rash decisions when viewing price movements on smaller time frame charts. Traders may observe what looks like a trend reversal on a shorter time frame chart. However, after viewing the daily chart, it is clear to see the trend is still well intact.
Four-hour EUR/USD chart providing misleading signals suggesting a trend reversal
Incorporating a longer time frame allows traders to see a ‘bigger picture’ of the currency pair, to get an idea of general trends, or the sentiment that may exist; while the shorter time frame chart can be used for timing entries into the market.
Therefore, looking at the daily chart, it is clear to see that the downtrend is clearly still in force when observing the correct time frame.
Daily EUR/USD chart: Showing a clear trend continuation lower
Traders should adopt multiple time frame analysis to incorporate as much information as possible into the analysis – without overcomplicating the analysis.
The beauty of this approach is that technical analysis can be applied on both time frames to achieve greater conviction for the trade.
Technical analysis techniques for identifying the trend
- Understand and identify forex trendlines
- 200 day moving average (for traders using the daily time frame)
- Moving Average Convergence Divergence (MACD)
Technical analysis techniques for identifying entry levels
- Moving average crossovers
- Candlestick analysis
- Using key levels of support and resistance
- Using indicators such as: RSI and MACD
TRADING WITH MULTIPLE TIME FRAMES
As mentioned above, the type of trading strategy adopted will greatly influence the forex trading time frames selected. Alternatively, rather than selecting a single time frame to trade, many traders will adopt a technique called Multiple Time Frame Analysis. This involves viewing the same currency pair under different time frames.
With this approach, the larger time frame is typically used to establish a longer-term trend, while a shorter time frame is used to spot ideal entries into the market.