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Grasping the time frame is the foundation of profit

2024-05-14

The concept of a time frame refers to a specific period of time, during which the price action is displayed on a chart. In the context of trading, a time frame is the time period that traders use when observing price trend charts on the MetaTrader 4 (MT4) trading platform. The time periods typically available on trading platforms include: 1-minute chart (1M), 5-minute chart (5M), 15-minute chart (15M), 30-minute chart (30M), 1-hour chart (1H), 4-hour chart (4H), daily chart (D1), weekly chart (W1), and monthly chart (MN).

Let's first define the time frame simply: it is considered as an independent time period with a time difference of 4-5 times, for example, a month has 4 weeks, a week has 5 trading days, a day has 6 sets of 4-hour trading sessions, and an hour has 4 sets of 15-minute trading sessions, and so on. This is how we get the weekly level, daily level, hourly level, and 15-minute level. If the hourly chart is used as the core trading time frame, the previous level of the daily chart can be referred to as the larger time frame, and the 15-minute chart can be referred to as the smaller time frame.

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I. Characteristics of Different Time Frames

(1) The larger time frame governs the smaller time frames; if the larger time frame has not completed its cycle, the smaller time frame will not end.

This is akin to the larger time frame being the overall strategy, while the smaller time frame represents the specific route of progress. In other words, if the trend on the daily chart has not completed its course, the hourly chart will eventually continue in the direction of the daily chart.

(2) The market movements of the smaller time frames aggregate into the trends of the larger time frames.

If there is an anomaly in the smaller time frame's movement, the strength and intensity of its motion will foreshadow potential changes to the larger time frame. In other words, at certain times, the smaller time frame exhibits a particular pattern that is contrary to the larger time frame, and if this pattern is strong, as demonstrated by the slope, the strength of the candlestick, and the duration over time, it could potentially lead to a reversal of the trend.When the direction of the long cycle and the short cycle is inconsistent, such as contradictions between the weekly line and the daily line, the following phenomena generally occur:

(1) Oscillation, which is equivalent to a fight between the long and short cycles, and is manifested in the chart as a trendless state.

(2) Adjustment at the next level, after which the market continues to move in the direction of the original trend, that is, the direction of the time cycle at this level. At this time, when the trend resumes, it is also our entry point or addition point for this trading cycle.

(3) Trigger a larger level of adjustment. This leads to a change in the trend of our trading cycle. If there is a failure to break through or unsmooth progress on the short cycle chart, it is often the entry point of the previous level.

(4) Finally, it directly leads to the reversal of the long cycle trend. The emergence of these adjustment points often has certain characteristics in terms of time and space, and we need to be sufficiently vigilant at some key time and space nodes.

II. Use Multiple Time Frame Analysis

Multiple time frame analysis, in simple terms, is to study the same market trend within different time frames. Zhang San may see a downward trend on the 4-hour K-line chart, but Li Si sees from the 5-minute chart that the trading instrument is just fluctuating up and down. And they may all be correct.

This raises a question. When analyzing the 4-hour chart, the chart sends a sell signal, but when observing the hourly chart, it is found that the exchange rate is slowly rising, and traders are easily confused. Learn how to use multiple time frames for trading.

Novices all want to get rich quickly and will choose smaller time frames, such as 1-minute or 5-minute charts, for trading. Then in the trade, they will feel helpless because it is not suitable for them.

For some traders, they feel that the most suitable is to trade on the 1-hour chart. The time range of the hourly chart is longer, but not too long, and the trading signals are fewer, but not too few. Trading in this time frame will give them more time to analyze the market conditions.So, what is the most suitable trading time frame? In fact, it depends on the trader. Of course, when starting to trade, traders should not be limited to a specific time frame. They can start with a 15-minute chart and then look at a 5-minute chart. Of course, they can also try to look at a 1-minute chart, a daily chart, and a 4-hour chart.

This kind of trial is very common for beginners until they find a trading time frame that suits them. This is also why many experienced traders advise beginners to start with simulated trading first. They need to use this method to find the time frame that suits them best.

If a trader prefers to handle things at a slower pace and always responds calmly in each trade, a longer time frame may be more suitable for them. Or, if a trader likes the excitement and a fast-in-fast-out trading style, then they should choose to trade in the 5-minute chart.

III. Choices for Different Trading Strategies

Trading strategies are divided according to the length of holding positions: intraday trading, swing trading, and trend trading. The holding time is closely related to the time frame used in trading. Generally speaking, the longer the holding time, the larger the time frame should be; the shorter the holding time, the smaller the time frame should be. Long-term, medium-term, and short-term are the common standards for holding time.

For intraday traders, positions cannot be held overnight because overnight means that the risk is out of control, and the account faces a huge risk exposure. Regardless of profit or loss, intraday traders will close all positions on the same day. They usually choose: 5-minute charts, 15-minute charts, 30-minute charts, and 1-hour charts.

For swing traders, they need to analyze the mid-term trends of the market, analyze price patterns, and judge the timing or points of opening and closing positions. Because they need to judge the mid-term trends, traders need to see at least the price data of the past few weeks on the chart. In this case, they need to choose: 1-hour charts, 4-hour charts, and daily charts.

For trend traders, they need to observe the long-term trend of prices to judge the overall market trend. Therefore, the charts they need to observe should at least include price information for more than a year. Long-term trends are often determined by fundamentals, and the occurrence of major events, such as changes in interest rate policies, the US election, Brexit in the UK, etc., are often the turning points of trends. Therefore, the information in the chart should reflect the impact of major events on exchange rate prices. Trend trading needs to consider the large historical background, and the time span to be viewed is relatively large, so they generally choose: 4-hour charts, daily charts, and monthly charts.

There are also some ultra-short-term traders, such as scalping traders, who may choose a shorter time frame, such as a 1-minute chart. The characteristic of scalping trading is that as long as the order profit can offset the spread, it will be closed, and there is no need for a large profit amount. Therefore, the holding time is often very short, and the shortest is only a few seconds.Additionally, many traders do not solely rely on a single time frame when trading. They often switch between several time frames to make a comprehensive judgment of the market trend and signals, and then make decisions based on this, which is known as "multi-time frame analysis." For example, some intraday traders often start by looking at the 1-hour chart to determine the market's trend direction, then switch to the 30-minute chart to re-assess the market direction or price patterns, and finally switch to the 5-minute chart to find an appropriate entry point. Traders will only enter the market when all trading conditions are met.

For novice traders, it is recommended that they adopt swing trading or long-term trading, focusing on larger time frames, and avoid intraday trading or short-term trading. These types of trading are very challenging, and for beginners new to the foreign exchange market, making a profit is almost impossible.