Understanding the importance of forex time frames in forex trading
Sundry forex time frames in the forex trading allow traders to determine more granular price action and larger trends which might lead to massive profits. When you switch between various time frames on the same asset or currency pairs, your viewpoint varies. This outlook can lead to two outcomes. You may either receive profit by using them or might hinder the analysis. In this guide, we will include you to the concept of forex time frames. This guide talks about these points:
- What are forex time frames?
- What are the major forex time frames?
- How to choose forex time frames depending on trading strategy?
- Which is the best forex time frame for you?
What are forex time frames?
A time frame describes the total time over which the trend lasts in the forex market, that can be used and identifiers by traders.
The forex trading time frames are generally divided into three categories: short-term, medium-term and long-term. Traders can incorporate all three, or they can simply use one shorter time frame and one longer time frame while examining the potential trades. The shorter time frames are beneficial for timing entries at the same time; longer time frames are useful for determining a trade set-up.
What are the major forex time frames?
As explained above, there are three types of time frames: the long term, short term and medium-term. The table provided below will help you to understand each of them and their use as per trading strategy.
|Forex time frames||Strategy||Trigger time frame||Trend time frame|
|Short term||Day trading||Hourly||4 hours|
|Medium term||Swing trading||4 hours||Daily|
|Long term||Position trading||Daily||Weekly|
How does the selection of a time frame affect forex trades?
There are numerous advantages associated with switching between various forex trading time frames. It is more visible when comparing stocks and forex. Because of absolute liquidity of the foreign exchange market, investors and traders can observe concise time frames and extract meaningful data. On the other hand, with the same time frame in case of illiquid stock, it may not display any new data points in case the price has not varied.
The next advantage of forex time frames is the market hours of forex (24 hours of nature) during the week. Switching between various frames during different trading sessions such as European, US and Asian allows traders to understand different characteristics related to the concerned trading session. It includes trending markets at the European session, ranging markets at the Asia session and cross over at the US session. Traders can gain profit from the various characteristics of these markets and can also use multiple time frames to identify ideal entries.
How to choose forex time frames depending on trading strategy?
Many a time, traders get confused while trading currency pairs—the confusion line in exploring the different time frames. For instance, sometimes the daily graph or chart may show you an up-trend at the same time, the hourly graph might be indicating a downtrend. But which way should you consider while trading it?
This confusion can lead to counter-productive uncertainty in the mind of the trader when trying to line up trades. Thus, it is vital on the trader’s part to plan the time frames he/she wants to trade concerning his/her trading strategy.
Day traders are the one who usually attempts to close out their trade orders the same day they enter into the position and do not hold their trade positions overnight. For such traders, the time frame can be determined as follows:
1) The long term: For day traders this time frame includes an interval lasting from a few hours to a whole day session.
2) The medium-term: For day traders this time frame includes an interval lasting from ten minutes to about an hour.
3) The short term: For a day trader, the short term time frame includes an interval lasting from a few seconds to minutes in duration.
The next are swing traders. These are the ones who attempt to take benefit of larger price fluctuations in the forex market. They are comfortable with holding their trading position overnight. The most appropriate time for each of these time frames categories for swing traders are as follows:
1) The long term: For a swing trader, this time frame includes an interval lasting from a few months to a year or larger in duration.
2) The medium-term: For a swing trader, this time frame includes an interval lasting from a few weeks to a month or more than this.
3) The short term: For a swing trader, this time frame includes a relatively brief interval lasting from some days to a week or more than this.
Last but not least are those who are employed in long term foreign currency investment activities or foreign exchange trend trading. These usually have a more extensive time frame for which they are ready to hold trade positions. The suitable time for each category in such case is:
1) The long term: For a trend trader or investor, this time frame includes an interval lasting several months to a few years or more than that.
2) The medium-term: For a trend trader or investor, this time frame includes an interval lasting from few weeks to few months.
3) The short term: For a trend trader or investor, this time frame includes an interval lasting several weeks.
Which is the best forex time frame for you?
Many neophytes often ask these questions while trading the forex market: Which time frame is better? And How to choose among various time frames? The answer to both these questions is one. Selecting the best forex time frame lies greatly on the trading strategies and style which you prefer.
To select the best time frame, you should consider the trading style with which you are comfortable and wish to follow. Accordingly, choose a technical analysis graph or chart you are comfortable with, ensure to apply sound risk management techniques on all traders and perform a thorough analysis.
The Bottom Line
Selecting a time frame while trading in the forex market depends largely on your personality and trading strategy. A desperate trader will trade on shorter time frames. On the other hand, the calm trader will prefer an extended or longer time frame and will choose to hold the position for an extended interval. Switching the position concerning the forex time frames can lead to profit, but at the same time, it may hinder your analysis or bring unnecessary losses. Therefore, it is vital to have a strong foundation about the concept from the very first trade.
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