The Best Time Frame For Forex Trading
Timing is everything when you are trading forex, as there are optimum time periods that enable you to make the most out of the fluctuating exchange rates. Some time periods also warn you against trading and help you stay away from the volatile market.
In this article, we take a look at the best time frames for forex trading:
What are the time frames in forex trading?
A time frame is a designated time period where forex trading takes place. Time frames can be measured in minutes, hours, days, weeks, months and years. You can choose the time frame that best suits your trading strategy and place orders within that specific time frame.
What are the different types of time frames in forex?
A short-term time frame occurs within a time period of a few minutes, hours, or days. In a short-term time frame, you hold forex positions for no more than seven days. You can make the most out of a short-term time frame when the market is highly volatile as short-term time frames provide you with the opportunity to trade the extreme price changes. For example, if you place a trade at 3:00 pm and close it at 3:25 pm, it will be considered as trading a short-term time frame.
A medium-term time frame occurs within a time period of a few weeks or months. In a medium-term time frame, you hold forex positions for no more than 364 days. You can make the most out of a medium-term time frame when the anticipated future market trend is in your trade’s favour. For example, if you open a trade in July 2022 and close the trade in January 2023, it will be considered trading in a medium-term time frame.
A long-term time frame occurs within a time period of a few years. In a long-term time frame, you hold forex positions for over one year. You can make the most out of a long-term time frame when you are following a buy and hold strategy with an expectation of the currency pairs performing incredibly well over the span of a few years to maximise profit potential. For example, if you open a trade in July 2022 and close the trade in September 2023, it will be considered as trading a long-term time frame.
How does time frame analysis help forex traders?
You can choose the ideal time frame for your trading strategy based on your personal trading style, strategy, objectives and fundamentals. Thereafter, a technical chart will help you identify ideal entry and exit levels within the selected time frame. Different time frames might give you different signals, and that is why it is advised for beginners to focus on the best time frame that suits your trading plan the most. For example, suppose you wish to trade USD/EUR on a technical chart. Assuming the current exchange rate of the currency pair is 2, the short-term hourly time frame indicates an uptrend at 2.5 and provides you with a long trading signal. On the other hand, analysing the medium-term monthly time frame indicates another bullish trend at 3.2, again giving you a long trading signal. However, when you look at the broader long-term yearly chart, it signals a downtrend, with the expected exchange rate to drop to 1.6 after a year. This provides you with a signal to short the trade at the current exchange rate. Now, if you are a day trader, following the bullish trend signal is suitable as you wish to only hold positions for a few hours or days. However, if you are a long-term trader with a motive to invest a certain amount for a few months or years, the bearish signal is the right opportunity to follow. Choosing the time frame will solely depend on what your end goal is.
What are the suitable time frames for different traders?
1. Swing traders
Swing traders hold the currency pairs for a few days or months to benefit from the price swings. Prices fluctuate on a daily basis, providing swing traders with several ideal exit and entry levels. Since swing traders hold onto the trades for more than a few days, their trading decisions are slow in nature and hence the medium-term time frame suits them the best. The medium-term time frame allows traders to analyse the currency pair’s trend direction, resistance (where rising prices stop rising and start falling) and support (where falling prices stop falling and start rising) levels and place orders accordingly. Swing traders use the daily, weekly and monthly charts to trade the medium-term time frame.
2. Day trader
A day trader executes several trade orders in one single trading day. They open multiple sell and buy positions to make small profits that accumulate and become significantly large as the market closes. Since swing traders hold onto the trades only for a few minutes or hours at maximum, they are required to make frequent and quick trading decisions. Hence, a short-term time frame suits day traders the best as it allows them to analyse quick market movements and provides them with the upcoming trend. Day traders can also combine their time analysis with a daily chart to confirm market trends with ideal buy or sell signals. Day traders use minute and hourly charts to trade the short-term time frame.
3. Position trader
Position traders follow the buy and hold strategy in the long term, which usually lasts for several months and even years. Their motive behind holding trade positions for long is a significant appreciation in the investment. Position traders are unaffected by the small price movements and focus on the bigger picture, which is why a long-term time frame suits them the best. The long-term time frame provides position traders with an overall future market trend direction based on which they can place long or short orders. Trading in the long-term time frame also helps position traders to be less worried about a sudden price incline or decline as their end objective remains the same, investment growth. Position traders use the monthly and yearly charts to trade the long-term time frame.
Scalpers place several trading orders at once and hold them for as little time as possible to profit from small price changes. They hold positions for only a few seconds or minutes with a motive to grab any price change in their trade’s favour. Since they are highly active in placing orders and try trading at the most liquid times when prices are the most volatile, the short-term time frame is the ideal time frame for scalpers. This is because the short-term time frame allows them to quickly understand where the market is headed and how the currency pair will react the next moment so that orders can be placed accordingly. Scalpers use the minute charts to trade the short-term time frame.
5. Momentum traders
Momentum traders focus on buying and selling currency pairs according to their trend’s direction. When the currency pair exchange rates are rising, momentum traders place long orders, and when prices are falling, they place short orders. The goal of momentum traders is to grab trading opportunities amidst the market volatility in the short and medium-term. Since they place orders according to the market’s momentum, the short and medium-term time frames suit momentum traders the best as they also provide them with an expected market uptrend/downtrend in the coming few hours, days or weeks. Momentum traders use minute, hourly, and weekly charts to simultaneously trade the time frames.
6. Algorithmic traders
Algorithmic traders place trading orders based on computer programs at best possible time and exchange rate. Traders provide particular instructions and algorithms based on each trade, which the computer executes on their behalf. Hence, the trades are completed at any time of the day and so any time frame, short, medium or long-term, rightly suits algorithmic traders. Algorithmic traders analyse hourly, daily, weekly, monthly, and yearly charts to understand the expected future market trend direction.
How to trade multiple time frames in forex?
Once traders are familiar with the different time frames, they combine two or more time frames to have a stronger analysis of the market’s trend’s direction. This helps them place accurate orders based on confirmed market trends. The multiple time frame analysis is the concept of analysing several time frames together. In multiple time frame analysis, you analyse the same currency pair in different time frames to confirm a market trend. Here is how you can trade multiple time frames in forex –
- Choose a medium-term time frame for the currency pair you want to trade.
- Select a short-term tie frame after determining the average holding time of the trade. The short-term time frame should at least be one-fourth of the medium-term time frame.
- Finally, select a long-term time frame which should be at least four times the medium-term time frame.
For example, if your medium-term time frame to trade USD/EUR is a 4-day chart, your short-term time frame will be a 1-day chart, and your long-term time frame will be a 16-day chart. The 16-day chart will help you establish a dominant trend in the market and signal you to place an order in the trend’s direction.
- If there is an uptrend in the 16-day chart, analyse to place a long order.
- If there is a downtrend in the 16-day chart, analyse to place a short order.
Now take the 4-day chart and analyse the smaller moves that make the dominant trend to confirm the trend. The 4-day chart acts as an average of the short-term and long-term time frame and provides you with a clear representation of where the market is headed. If the smaller price moves are in the same direction as the dominant trend, there is a high probability of a successful trade ahead. Finally, open the 1-day short-term chart to pick your ideal entry position to enter a long or short trade from the several small price fluctuations. When you have picked the ideal entry-level, all you have to do is wait for the trade to move in your favour as analysed. When you put the results of all the three-time frames together, the odds of success increase as you trade with respect to a more significant trend. All types of traders can utilise this strategy as all time frames are analysed together. Hence, if you are a day trader, you can take a position based on the 1-day chart, and if you are a position trader, your focus can be on the 16-day chart. Another benefit of using the multiple time frame analysis is that it allows you to short the trade if the short-term and medium-term time frames depict a downtrend but the long-term time frame indicates an uptrend. This enables you to benefit from both rising and falling markets.
Trade with the best time frame based on your trading style
You can use a single best time frame or apply the multiple time frame strategy that aligns with your trading style to place successful trade orders. Place your first forex order with Blueberry Markets and enjoy a seamless trading experience. Sign up for a live trading account or try a risk-free demo account.
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