Chart Time Frames
Traders need to understand how and when to identify an underlying trend to make profits in the market and achieve their goals. Trends are classified as primary, intermediate and short-term. Since there are various time frames in a market, there may occur diverging trends for a specific stock as per the timeframe chosen. Below are the different time frames:
Long Term / Position Trader
Traders here tend to react to Daily and Weekly charts. The daily charts assess in placing entry orders whereas the weekly charts will determine the overall trend and long term viewpoint. Traders using these charts trade from weeks to months or even years.
- There is no need to observe the market regularly.
- This involves few trades and hence low transactional costs.
- It may require large risk capital in order to resist large drawdowns.
- Traders are required to be patient as it takes a lot of time for good trades to appear and come only for a few times a year.
Short Term / Swing Trader
Here, hourly time frames are often used by traders and hence trade for hours to a few weeks.
- If compared to longer time frames, traders get more chance to trade in this time frame.
- This is considered a better option by traders than longer time frame where they may feel detached from the market and shorter time frame where they may have constantly stick to the market trend.
- This involves higher transactional costs than long term trading.
- This time frame may involve overnight risk.
Intraday / Day Trader
Traders refer to the minute and hourly charts and hence trade in shorter time frames. They often trade for a whole day and make exit from markets before the market close.
- There is a number of opportunities available for trade to traders due to really shorter time frames.
- This time frame does not involve any overnight holding risk.
- As this time frame involves numerous trades, hence transactional costs are quite high.
- Traders are required to constantly monitor the market trends which may increase anxiety levels.
Every trader has a different perspective to markets and different goals, hence the selection of time frames depends on the traders’ choice. Traders tend to use the long-term chart to define the trend, the intermediate-term chart to provide the trading signal and the short-term chart to refine the entry and exit.
Below is discussed an example to show how different time frames can show different price actions.
Let us take an example of trading currencies and their trend in different time frames.
5 Minutes Chart
Taken EUR/USD trade, 5-minute chart implies a bullish trend by showing the pair trading over 100 SMA.
Again the same currency pair EUR/USD, this chart, that is a longer time frame or trend actually indicates a bearish trend as prices are falling.
4 Hours Chart
By observing the same pair in this longer-term chart, it can be seen that there is bullish trend contradicting the 1-hour chart.
At last, a daily chart that is as far longer time frame proves the bullish trend wrong by showing the bearish trend as prices keep on falling.
As shown in the above example, different time frames provide different signals, traders are advised to analyse multiple time frames or at least next higher time frame to make sure the trading decision taken provides good returns. By analysing narrower time frames, traders get help in entry and exit points and longer term charts help them to affirm their idea or speculation. To conclude, multiple time frames can give a broader perspective and understanding of trends to traders to make an ideal trading decision.