What are time frames?

What are time frames?

Time frames
Photo by @wanaktek

Understanding time frames is a key element to technical analysis. Albeit, quite challenging, if you can get to grips with it then you’ll be in a better place to see the bigger picture of the markets. 

In this lesson, we’ll cover:

  • How time frames work
  • The types of time frames you’d use
  • The most commonly used time frames
  • How to use different time frames together
  • Some examples and which are best to use in trading

How do time frames work?

Time frames in trading are the time you choose to look at a trading chart. There are different periods you can choose and this will give you a different perspective of the market.

Each period on a trading chart is a portion of time. If you were to choose a 5-minute timeframe, each period would equal five minutes. The same is the case for monthly, weekly, daily, hourly, minutes and even seconds on some platforms.

When we talk about time frames in trading, there are three key elements we’re referring to:

 

  1. Expected length of the trade or investment
  2. The time you will base your analysis on
  3. The time interval you choose of the chart (for each period)

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Length of the trade

When you take a trade, you don’t know how long it will take to reach your expected target level. However, you can get an idea based on the time frame you use to analyse.

When you build your trading strategy, you should consider the following when it comes to the length of the trade:

  • What your target price is and how long you think it will take to hit it?
  • What is your trading style? Do you expect the market to reach your target in a few minutes of days, weeks, or months?
  • Are you day trading? Will you exit the trade no matter where it is at the end of the day?
  • Are you comfortable trading over longer periods of time?

You should have these types of questions answered when you create your trading plan.

Amount of time we base the analysis on 

The time frame you use to do your analysis will depend on how long you intend to hold your trade for.

If you intend to only hold it for a maximum of an hour, then you wouldn’t be doing the majority of your work on a weekly chart. And vice versa, if you want to hold a position for months or years, then you wouldn’t use a five-minute time frame to do your analysis.

If you’re a scalper, you would be using an hourly time frame to give you an idea of direction but then drill down into a five minute or smaller time frame to identify your entry and exit.

Longer-term investors will rarely go to anything under a daily chart because their entry doesn’t need to be so precise. Over the length of their trade, a difference of 50 pips won’t affect their P/L much at all.

The chart time interval

The chart time interval again will depend on how long you expect to hold the trade. But being specific about which one you use will depend on you. Individuals are different, and trading strategies are different.

Two-day traders may both hold their positions for the same time but analyse the markets using different time intervals.

Shorter-term traders will use smaller time frames and longer-term traders will use larger time frame intervals.

Why are time frames important in trading?

Time frames are hugely important because they add scale to your trading strategy. It is the basis to create a strategy and in turn, decides how you will analyse your trades and identify opportunities.

Using incorrect time frames for your trade will result in inaccurate trade opportunities arising and causing you to lose. 

Being consistent with your time frames is also important. There is no need to start changing them if you have had a bad trade, it is a case of testing and seeing whether it works. If it doesn’t work over 10-20 trades, then yes, perhaps it is best to change the time frame.

Time frames are also important to give you an overview of the bigger picture of the market. Traditionally, traders that combine several time frames are more successful. This is because they can identify the trend via a large time frame and then go into a smaller time frame to pinpoint great entries and exits.

How many types of time frame are there?

There are three main types of time frame — short, medium, and long term. 

Short time frame

Short time frames tend to be any trade that hits its target within the day. To identify such an opportunity, you would be looking back between 1-10 days to gauge your strategy. You would likely use time frame intervals of an hour and smaller.

Medium time frame

Medium time frames are considered to be over a few days or several weeks. You would be looking back between 5-50 days to base your analysis and likely use time intervals of between 15 minutes to daily.

Long time frame

Long time frames are considered to be multiple weeks, and more likely months and years. Long term trading and investing are essentially the same. Some might argue that investing is longer, but the premise of holding your trades for significant time and ignoring the volatility noise is the same.

You would likely be using a weekly and a daily chart to base your analysis from. Sometimes you might use a four hour time interval for a better entry but that would likely be as small as you go.

What are the most commonly used time frames?

Time frame preferences will depend on the individual trader and can also depend on the time frames available on the trading platform they’re using.

Two of the most common time frames to use are the daily and the hourly. The combination give you a great overview of the market.

Short time frame examples

 

Here’s an example of a five-minute chart and trade. You can see where the entry-level would have been and how long it would have taken to hit its target.

 

5-minute time frame
5-minute time frame from TradingView

Medium time frame examples

 

Next, we have a medium time frame example, here we’re using an hourly time frame and you can see how long it takes for the trade to hit its target, as well as the setup length.

 

Hourly time frame
Hourly time frame from TradingView

Long time frame examples

Finally, here is an example of a long term trade set up and execution. You can see that the daily chart is used and how long it took for the trade to hit its target versus how much time was needed to come to the conclusion of the trade setup.

Daily time frame
Daily time frame from TradingView

What is the best time frame to trade forex?

There is no best time frame to trade forex. It comes down to you and your strategy. You may hear people talk about times to trade forex because the market is open 24/5 but that doesn’t necessarily make any time frame better or worse than another.

You can trade forex in short term time frames, medium-term time frames and long term time frames, choosing which one is up to you.

The forex market does have an advantage over other markets when it comes to short term time frames. This is because it’s a very liquid market and therefore it is easier than other markets to get the price that you want. 

Technical analysis using multiple time frames

A huge part of technical analysis is using time frames in combination with each other. Ideally, you would be looking for all time frames to confirm the same direction. A common practice in using time frames is as follows:

  1. Start on a higher time frame like a daily. This will give you a bigger picture of the market sentiment and ideally allow you to decide the market direction. If it is clearly trending up, then you would only be looking for buying opportunities.
  2. Then you would go into a smaller time frame, like an hourly time frame. Here you would identify your buy levels. Where is the best place to buy this market? Here you would use your strategy to find these. This could be by identifying support levels.
  3. Then you would go into a smaller time frame, perhaps a 15-minute time frame to enter the trade. Once the price came into your buy zone, you would use the 15-minute time frame to time your entry. If you see a rejection candle on your support line, then that is the signal to enter the trade.

 

Our next lesson is where we go into a little more detail about support and resistance in trading.

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