What is Time Frame in Trading – Inveslo
Learn About Forex
26 October @ 11:38

What is time frame in trading & know the time frame trading strategy

Time frames are crucial in trading for analyzing price movements and making informed decisions. They represent specific periods, ranging from seconds to weeks, during which traders observe and assess market trends. By utilizing different time frames, traders enhance their trading strategies. In this article, we will explore the significance of time frames, determine the best time frames for trading strategies, and emphasize the importance of multiple time frame analysis.

What Are Time Frames?

Time frames indicate the duration of price fluctuations. They help traders analyze trends and patterns within specific periods. For example, minute-based time frames focus on movements within each minute. The choice of time frame is essential for relevant market analysis.

Importance of Time Frames in Trading

Selecting the appropriate time frame filters out irrelevant price movements and provides traders with essential information. Time frames help identify trends and make timely decisions.

Determining the Best Time Frames for Trading Strategies

The optimal time frames depend on the assets and trading strategies employed:

  1. Scalping: Traders aiming for small price movements in a short time commonly use time frames of 1 to 15 minutes, with 1-2 minutes being prevalent.
  2. Day Trading: Traders opening and closing positions within a day typically analyze 60-minute time frames for primary trend analysis and shorter time frames (15 to 60 minutes) for short-term trends.
  3. Swing Trading: Traders capturing medium-term trends hold positions for several days to weeks and often rely on four-hour time frames.
  4. Position Trading: Traders holding positions for longer periods use daily and weekly time frames to evaluate trends.

How to find the Best Entry using different Timeframes

There are many different timeframes that you can choose from when it comes to the forex market. Depending on the platform you use, you may also be able to set your own custom timeframe. A variety of standard timeframes can be found on the MT4 platform, which is one of the most popular platforms available. It consists of 1M, 5M, 15M, 30M, 1H, and 4H, as well as Daily, Weekly, and Monthly.

Having said that, what exactly is the difference between all the different timeframes? If I say, for example, that I am using a 4-hour timeframe (H4) for analysis, what does that mean? It simply means a candlestick that is made within a period of 4 hours. In different ways, different timeframes are suitable for different traders. In order to scalp trades with shorter timeframes, such as those spanning from five minutes to one hour, one must also be able to take intra-day trades with one-hour and four-hour timeframes during the day.

As a rule of thumb, it is critical to keep in mind that the shorter the timeframe, the longer you will need to spend watching the charts, as quick volatility can also result in more noise in the market if we are exposed to it. Larger timeframes such as the daily and the H4 would be more suitable for traders who wish to make longer-term trades, such as long-term positions.

In total, there are four different timeframes. In order to understand the daily chart better, let's take a look at it. The week is divided into seven days, so in order to form a weekly candlestick on the daily chart, you have to have seven candlesticks on the daily chart. The daily timeframe has 24 hours, and if you do the math, 24 / 4 = 6, which means you are going to see six candlesticks in the H4 timeframe before the period ends. We all know there are 24 hours in a day, so on a daily basis, you will have 24 candlesticks on the H1 timeframe.

Generally, there are three types of time frames:

Long-term – Monthly, Weekly, and Daily.

Med-term – 4-hour, 1-hour

Short-term – 30-min, 15-min, 5-min and the 1-min

How do longer time frames differ from shorter time frames?

Shorter time frames generally show more movement than longer ones since one candlestick takes a shorter time to complete. This results in more market "noise" in a shorter timeframe.

Alternatively, if you are looking for more trade opportunities rather than a larger timeframe, shorter timeframes will give us more trade setups since the candlesticks will appear more frequently compared to a larger timeframe, making it easier to trade.

As an alternative, we would like to emphasize that there is a possibility that indicators or oscillators that are based on shorter time frames may not be as accurate as those that are based on longer time frames, and trends that are based on shorter time frames may not be as meaningful as trends based on longer time frames.

The most effective way to ride the trend is to start by analyzing trends from a higher time frame (Monthly, Weekly, or Daily) to a lower time frame. There is a method of trading that is commonly referred to as the "top-down" approach in which traders evaluate the higher time frame first in order to determine the direction of a trade before moving on to the lower time frame to look for entry points.

Using the top-down approach we mentioned earlier, in this section, we will look at the example of EURUSD to see how we can combine different timeframes by using the top-down approach to combine them.

As a starting point, let's examine the EURUSD Daily chart:

Chart, histogram

Description automatically generated

As seen on the chart, a clear downtrend can be identified as the price has been making lower tops and lower bottoms, trending down below the 50-day exponential moving average. Also, a clear descending channel can be drawn. We know from technical analysis that the channel upper line serves as a dynamic resistance and the lower line acts as a dynamic support line. On the daily time frame, the market has tested and held both lines nicely. Then we will move down into a shorter time frame to look for confirmation or more signals to prove our directional bias.

Next, let us look at the EURUSD H1 chart:

Graphical user interface, chart, histogram

Description automatically generated

When we look at EURUSD in the H1 time frame, we manage to find another short-term falling channel. Apart from the long bullish candlestick, we can see that the level that the price tested with a small pullback before pushing higher was the channel lower line, and the price is on its way to moving higher towards the channel upper line.

Now, let us pause and think for a bit. Price has tested and bounced away from the daily timeframe resistance level and is moving up in the lower timeframe. Hence, the downtrend is still strong but the price is in a corrective move in the short term. Hence, it is best to wait for a bounce back from the dynamic resistance before entering the market.

As a result, there is now more confirmation that this is a reliable downtrend to ride on, and you can definitely enter the trade with confidence at this point.

You can use a variety of timeframes for trading purposes, and this is just one of the many methods for doing so. Indicators, oscillators, and moving averages can also be applied from a higher time frame to look for support or resistance levels. The next step will be to move into lower time frames in order to look for candlestick patterns which can be used as entry points.

It is also possible to do it the other way around as well, which is to look for candlestick patterns from a higher time frame and then move into the lower time frames. You can then use oscillators such as RSI to identify overbought and oversold areas to validate the candlestick pattern.

It is a valuable tool to learn to trade within a different timeframe because it can help you become a more profitable trader as you learn how to do it. When you find yourself getting lost in a smaller time frame, remind yourself to go back to the larger timeframe so you can see what the overall directional bias is by going back to the larger time frame.

By learning advanced lessons, you can incorporate different tools for trading with different timeframes, which will definitely increase the odds of the trade being a profitable one.