We explain the pros and cons of day-trading using 5-minute charts, as well as why beginner traders shouldn’t neglect consulting longer-timeframe charts.
Chart timeframes: what they are
As you are most likely already aware, you can zoom in on a price chart to see only the most recent price action in detail or zoom out to see several years’ worth of price data. This example comes from the FlowOne platform:
If you select a 1-minute timeframe to magnify your view, then each individual Japanese candlestick on the chart represents one minute. So, if there are 50 candles on the screen, you are looking at 50 minutes worth of price data. A 1-day timeframe means the candlestick closes one day after opening, and so forth. Just to clarify, the timeframe refers to the length of time each candlestick (or bar on a bar chart) lasts, not how much time is covered in the horizontal axis of the chart – this depends on the screen width.
There are certainly enough timeframes to choose from. Fortunately, we can simplify the decision of which one to choose for our trading setups by defining three categories.
1 .Lower timeframe = 1- 30 Minutes
2. Intermediate timeframes = 1 hour to 6 Hours
3. Higher timeframes = 1 Day to 1 Month
Now, the decision has been simplified to whether to select a lower, intermediate or higher timeframe when planning and evaluating possible trades.
Rookie mistake: starting with lower timeframes
Something that, rightly or wrongly, entices many people toward short-term trading is the desire for easy money. Clicking a button on your computer and making a profit five minutes later is certainly an appealing idea. However, in trading, the big money is not made with quick bucks, it comes from winning more trades than you lose over long periods of time. This quote from the movie Wall Street sums it up well:
“Remember: there are no shortcuts, son, quick buck artists come and go with every bull market, but the steady players make it through the bear markets.”
Novice traders will typically have a smaller account balance than more experienced investors. This makes sense: they have not yet gained the confidence needed to successfully invest larger amounts of money into forex or other financial markets. But as a result of their small balances, they often harbour a mistaken belief that they can only afford to risk a small number of points on any given trade.
For example, if you have only 100 CHF in your trading account but each point moves your profit/loss by $10 – then you necessarily have to cut losses and take profits very quickly. This more or less forces you into lower-timeframe trading strategies like scalping or day trading. The alternative solution to managing a small account balance is to reduce the size of your trades, not their duration. In this same example, the trader could opt to risk 1 CHF per point – or even 0.1 CHF per point. In this instance, the trader could comfortably withstand moves of 100 pips or more in the price, offering the trades a lot more room to breathe.
Another reason new traders choose to look only at short-term charts is that they think that longer-term charts require them to be able to predict the market, whereas, in the short term, they can just jump in and out. This interpretation misses the point. It is much, much harder to predict where a currency will be in the next 5 minutes than where it will be in the next few days, because of the influence of large trades or unexpected news in short timeframes. Such things only amount to a blip on longer timeframes.
So, higher timeframes are better for forex noobs?
Not necessarily. While we’ve just warned about some of the flawed reasons new traders start with short timeframes, that’s not to say that short timeframe charts are all bad. A clear benefit of consulting short-term charts is that they give you a lot more detail about what’s happening, which is the only true way to learn forex trading online.
You are certainly better off choosing a short-term timeframe chart if you are planning on holding your trades for less than a day. It would be no good day trading small price moves in the market when using a daily timeframe, which shows only one candle per day – it would give you no information from which to trade.
The shorter the length of time you plan to hold onto a trade, the lower the timeframe you need to view the market. The number of minutes, hours, or days you will hold onto any trade is best informed by experience of seeing how fast a market can move a certain number of points.
For example, if you are aiming to earn 30 pips on a EUR/CHF currency trade, you can see in the chart below that a 15-minute candle chart quite accurately shows you the information you need:
However, if you hope to make 100 pips on a trade, there will be lots more little ups and downs to ride out, and such a movement will take longer to occur. The chart below shows that a 4-hour candlestick chart of EUR/CHF displays the price action at the amount of granularity needed to understand the progress of the trade.
Whether you choose to take profit at 5 pips, 30 pips, 100 pips, or 500 pips rests entirely with the type of trader you wish to be. In that sense, this decision is as much a question of psychology as math.
Advantages and disadvantages of different chart timeframes
Lower timeframes
The good thing about short-term charts is that new traders can gain experience quickly because many more opportunities are visible – and they offer the chance at quick profits.
The main disadvantage is that lower timeframes, by their nature, are very fast moving. Normally, only experienced traders with a well-tested trading strategy have the presence of mind to make the right choices under such pressure. New traders can get emotional at seeing profits and losses come and go quickly.
Higher timeframes
The advantage of higher-timeframe charts is that price moves take much longer to develop, giving the new trader significantly more time to think through the merits of each trade as well as any possible drawbacks. It also tends to mean a lot less screen time is needed so that, if and when you become a regular trader, you can enjoy the real benefits of a trading lifestyle.
The main disadvantage is that the trades take much longer to materialise and there are fewer opportunities to discern. This means higher timeframes give new traders little chance to practise their craft.
Intermediate timeframes
Without getting too obsessed about finding your “Goldilocks zone”, it’s quite often true that a timeframe that is neither too short-term nor long-term works best for newbie traders. It offers the best of both worlds: a little more time to think but also plenty of chances to practise.
In your quest to determine the ideal timeframe chart for forex trading, you might find yourself asking: “What is forex trading really, and how do people profit from it?” This question encompasses the essence of forex trading and profit generation, making it a crucial one for traders of all levels, including beginners, to ask themselves. Everyone’s investment goals are different, and this will naturally influence the timeframe on which you operate.
Conclusion
The good thing about, as well as the challenge, of trading is that there is no one-size-fits-all approach. This means that any new trader is within their rights to choose any timeframe that suits them. Hopefully, though, this article has given you some information to do so thoughtfully.
