Hello traders! In every Online Trading Academy class that I teach, the same question about charts always comes up: Which time frame should I look at? Like most questions in class, the answer is, “It depends.” What does it depend on? Your trading style. To help figure out what “style” of trader you are, you need to answer the following questions:
First: How much time do you HAVE to watch the market? Going along with this question is, “How much time do you WANT to watch the market?” If you only plan on watching the market for about 20 minutes a day, I’m afraid you don’t get to be a scalper. (A scalper plans to execute many trades a day with profit targets of around 10 pips and stops of about 3-5 pips.) Being a scalper is a bit hectic, perhaps even more stressful than you would like. If you plan on watching the market for a couple of hours or more a day, then scalping could be for you.
How about if you only want to watch/check the market 20 minutes in the morning then again 20 minutes at night? You get to be a swing or position trader. A swing trader is expecting to be in the market for a few hours to a few days, while a position trader may be in for a few days to a few weeks.
The next question is how often do you want to trade, and along with that is how many pips are you going for in a trade? As stated before, a scalper is only going for a few pips, while a swing trader is probably going for 50 or more. A position trader is more likely going for 200 or more. A swing trader will probably do 3-6 trades a week, while a position trader may do that many in a month.
Can you mix styles in your trading plan? Of course! As has been mentioned in other Lessons from the Pros newsletters, the Forex market is one of the better trending markets on the planet. On the following AUDUSD chart, you may have gone long at the intersection of the moving average and the yellow demand zone near the blue arrow. As a position trader, you let the trade run until you hit a major supply zone, such as the one marked at 1.06604, or a break of a trend line or even the moving average. This trade could have worked out for approximately 500 pips over a month.
So, back to the original question, what time frames should I look at? Generally, we suggest two, if not three different time frames. More than three is normally counter-productive as you are starting to get too many conflicting trends and you will never take a trade! So, let’s look at two for this discussion. Our larger time frame is where we get our trend and major supply and demand zones, while our smaller time frame is where we “time” our entry. In the following GBPUSD chart, the left chart is a 60 minute while the right is a 10 minute. After identifying a pair of clean supply and demand zones for our trade, we will look at our smaller time frame to figure out which candle to enter on. The green arrow is a “hammer” candle, which is a bullish reversal candle. This is also on the second bottom of a double bottom (also a bullish reversal hint!) in a high quality demand zone. This is how we “time” our entry!
The time frames then that you look at will be defined by your trading style. Here are a few suggestions: A scalper may look at a 10 minute for trend and supply/demand, and a 2 minute to time their entry; a swing trader may look at a 60 minute for trend and supply/demand with a 10 or 15 minute to time their entry; and a position trader may look at a daily chart with a 4 hour to time their entry. Our general rule of thumb of difference in time frames is a factor of 5 – but really the range is 4-6. What that means is if you look at a 10 minute to time your entry, multiply that time 4, 5, or 6 to get the next time frame higher. Ten times 6 is sixty, so the one hour chart is the logical next time frame to watch.
For more on multiple time frame analysis, check out an Online Trading Academy class or hang out in the Extended Learning Track (XLT) rooms – this topic is covered nearly every day! Until next time,