What Is The Best Time Frame To Trade Forex?
Trading the forex market can be very lucrative – especially when you are leveraging the right tools. However, there are dozens of different strategies, technical indicators and potential ways to trade the forex market. Although it might be easy for some to trade the forex market profitably, it is certainly very hard for others. In fact, trading the forex market might be very confusing for beginners who have no clue about technical analysis. Therefore, it is true that one must master the basics of trading before thinking about diving deep into the details of technical analysis.
In this piece of content, I want to introduce you to a very basic level of technical analysis, you’ll understand the significance of different timeframes and how to use them in the forex market.
Different Trading Styles – Identify Your Personality
In fact, trading is not a very rational process, although, in theory, it is. In reality, however, you first must understand what kind of personality you are before entering the forex market. There are plenty of different trading styles, all of which differ in frequency, volume and position size.
Day trading, scalping, and high-frequency trading, etc. all short-term trading. Short-term trading is commonly done by individuals who end all their trading activity at the end of the day to receive some regenerating sleep, without worrying about what is currently going on with the market and their investments. Furthermore, short-term trading suits individuals who tend to be more impatient, have plenty of different trading ideas and love to turn those ideas into numerous positions. The goal of short-term trading is that various smaller profits turn into a big profit at the end of the day. The frequency of trades is rather high, while the position size is relatively small. Thus, as long as the majority of your trades are profitable, you will end up making money.
Short-term traders often use the daily chart as a broad overview of the trend. Then, experienced day traders usually go from the macro to the micro. Consequently, they typically monitor the 4-hour, 1-hour and 15min charts. For example, if a day trader recognizes the confluence of many different indicators showing bullishness for the daily chart, he could look out for bullish and bearish arguments in the 4-hour chart. If he has found more bullish arguments than bearish in the 4-hour, chart he could watch out for the same confluence in the 1-hour chart. If the 1-hour is also bullish, he could wait for the 15min chart to have a perfect entry-level for a long position. This could include touching oversold regions in the RSI, a bullish crossover in the lower part of the MACD as well as reaching down to a support zone.
This is important to realize because the higher the timeframe, the bigger the relative volatility. If the daily chart indicates that a bearish candle is about to be formed in the near term, it would result in a massive series of bearish candles in the 15min chart. If you would only trade the bullish arguments in the 15min chart without looking at the daily chart, you could make massive losses although your initial analysis was correct in the 15min chart.
Therefore, having a broad overview of the higher timeframes enables day traders to minimize the risk of their trading activity.
Mid-term trading is for those who can’t stand having multiple positions a day and who can bear with having open positions while sleeping. Indeed, having money in the game while you are sleeping sounds crazy; however, stop-loss orders enable you to minimize your risk. Therefore, mid-term trading has no real downsides and actually enables you to reduce your trading activity tremendously in comparison to day trading without reducing the amount of profit. In fact, swing traders usually have much bigger position sizes and a much smaller frequency of trades, which is why the profits can be remarkable although you don’t trade as much as day traders.
Nevertheless, swing trading doesn’t mean you have to work less. It just means that you actually spend much more time analyzing your investment instruments than you spend actually entering your trades. Swing traders often look at the monthly, weekly and daily charts and enter trades comparatively seldom. To give a broad overview, swing traders often do only one to twenty trades a year. If you only enter a trade if there are many indicators pointing in the same direction while looking at the bigger timeframes, then your trading activity can be very rewarding. Thus, swing traders often leverage a much bigger position size as their risk-reward ratio is much bigger.
Long-term trading doesn’t really exist, rather, it is commonly known as “investing”: If you plan to hold any given security for years, there are many sociological, political and economic factors that surpass the capacities of technical analysis. Investing is mostly done by fundamental analysis.
The risk-reward ratio describes how much you can earn from a trade versus how much you can lose from it. For example, if you are trading a descending triangle pattern, your reward is the target of the pattern. If you put a stop loss two percent below your entry-level, your risk is two percent. Let’s say the target of the pattern is a 50 percent gain, which would mean your risk-reward ratio is 25 to 1. This, of course, is an excellent risk-reward ratio and would make a perfect trade, especially if many different indicators point in the same direction.
In any case, you should always look for a risk-reward ratio that is greater than 1:1. Very good risk-reward ratios are 4:1 and above.