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How to choose the right timeframe

17 Apr 2018,

How to choose the right timeframe

In previous works, we have introduced trading styles, basic price action and also classes of indicators. We also know that we can trade any market or candle formation, technical indicators, and we can also trade at a chosen timeframe, thereby increasing or decreasing the frequency of trades.

The timeframe is nothing else, but a time displayed through the candles on the chart. As you know from your Metatrader platform (how to set your Metatrader from A-Z), Sierrachart, Tradestation, Ninjatrader or any other platform, you can switch to:

  • M1 1 candle = 1 minute
  • M5 1 candle = 5 minutes
  • M15 1 candle = 15 minutes
  • M30 1 candle = 30 minutes
  • H1 1 candle = 1 hour
  • H4 1 candle = 4 hours
  • D1 1 candle = 1 day
  • W1 1 candle = 1 week
  • M1 1 candle = 1 month

We can analyze the market from different timeframes and here comes the first pitfall. The smaller is the timeframe, the lower is the validity of the price action patterns and technical indicators. Pinbar, inside bar, and other formats on minute timeframe will not have the same validity as for H4, D1 or higher timeframe. On your platform, you can view a specific market, such as EURUSD, in several different timeframes. You can analyze the market from a daily timeframe or, for example, hourly timeframe, or timeframe up to five minutes. If you do, you will probably be confused at first sight.

The higher the timeframe, the more time to think. On the contrary, you have to make a quick decision on a lower timeframe because, for example, if you are entering at the close of the candle, you must respond within a few seconds. For a smaller timeframe, there is also more “market noise,” a chaos that can mislead you.

Timeframe selection

Choosing the right timeframe should be based on your approach to the markets and your trading style. If you are attracted by intraday trading, where you can get up to several valid entries during the day, try to answer to yourself if you even have time for a one-minute timeframe. It is very time consuming to monitor market development and to be ready to respond immediately. In intraday trading, you will also definitely deal with emotions more than on a higher timeframe. You will probably monitor each price movement or P / L status and will not focus on the market as a whole.

Another problem of the one-minute timeframe is the volatility of the markets as you will have to trade in the main trading hours. If you trade off main trading hours at a very low timeframe, you will encounter slippages, larger spreads (with CFDs) and slower filling (futures).

Do not try to trade a low timeframe just because trading is exciting. You have to adapt your trading style to your situation and evaluate how much time you can devote to trading every day. It is also necessary to take into account the trading hours of the given session. If you trade in US markets, the trading hours begin at 3:30 PM. Until then, there is not enough liquidity and trying to trade in markets where there are not enough traders to fill the orders or to provide sufficient market movements does not make so much sense. It is not worth to trade these markets outside trading hours.

The most popular markets such as the Nasdaq, Dow Jones, or S & P 500 will only be available for trading between 15:30 and 22:00 of our time, so if you only have time in the morning, you will have to look for European markets where only DAX, FTSE or CAC40 are available. In case you trade forex and CFD in general, you will have much more options. Keep in mind that for a minute timeframe you have to watch the market really carefully and a few minutes of absence can lose you a signal you have been waiting for several tens of minutes or a few hours.

When choosing a higher timeframe, you can plan your trade in advance, from a 15M timeframe, you can analyze the markets hours ahead and enter either through pending order or set up alerts to your platform that will let you know when the price approaches your level. Higher timeframes are also more suitable for your job, as you can plan your trades with pending orders or open the trade, for example through a cell phone.

If you work from home, you can manage trading on low timeframes, but if you regularly go to the office, and you have more free time there, I doubt your colleagues or manager will understand why you cannot work or reply to emails because you are currently managing your EURUSD position.

On the contrary, it will be much better for your trading when you start on a higher timeframe, and you will gradually prepare yourself for lower timeframe. With the growing experience and even with the time that you can devote to trading, you will be and more ready to do more trades during a day.



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