how-to-trade-daily-time-frame

Most beginner traders often think that money is made in the short-term timeframes, so they go the way of intraday trading, believing that it will enable them to quickly grow their small trading accounts.

They have this belief that the lower timeframe provides more trading opportunities that can allow them to make more money in the long run.

Given, the daily timeframe offers fewer trading opportunities and may seem slow and non-exciting to most traders, but there in lie the benefits — it forces you to have patience, trade less often, and make better trading decisions.

While the intraday timeframes offer more trade setups, most of them fail, making you lose more money.

In this post, we will explore the benefits of using the daily timeframe, different styles to trade with the timeframe, when the timeframe may not be very useful, and important trading tips that can improve your trading outcome.

The benefits of using the daily timeframe

There are many benefits to trading on the daily timeframe or, at least, using it in your technical analysis of the market. Here are some of them:

A better view of the market structure

The daily timeframe helps you to have a broader perspective of the market so you can have a better view of the price structure and the stage of the market cycle.

It gives you a bigger picture of the market — you can see the price action over a longer period. 

That is, on your price chart, you can see the price action of the last eight months or more, depending on how bold you made them (zoom %).

On the other hand, when you change to a 30-minute timeframe, you barely see up to a month’s price action.

In essence, the lower timeframe limits your vision of the historical price data, which you need to ascertain the structure of the market, its stage of development, and the best way to trade it.

To put it simply, the daily timeframe helps you to know if the market is trending or in a range.

While the lower timeframes can only show you the short-term trends, the daily timeframe can show you every import price movement — short-term, medium-term, and even long-term trends if you zoom out.

Successful trades are made in the direction of the predominant trend, which is often the part of the least resistance.

Easy ways to identify the trend direction include using a trend line, a long-period moving average, or following the direction of swing highs and lows — a series of higher highs and lows equal an uptrend, while a series of lower lows and highs equal a downtrend.

More significant support and resistance levels

The price swing points on the daily timeframe are more significant than those on the lower timeframes, and you know why — more traders are watching the daily timeframe than any other timeframe.

Even some intraday traders keep an eye on what happens on the daily timeframe. With many traders watching the support and resistance levels on the daily timeframe, there tend to be more orders at such levels, which is why the price usually respect them more than similar levels in the lower timeframes. 

In fact, the lower the timeframe, the less significant the support and resistance levels. What seems like a beautiful range in a 30-minute chart, with well-respected upper (resistance) and lower (support) boundaries, may actually be a single price bar in the daily chart, and the so-called boundaries of the range being the high and low levels of the D1 price bar.

But when a level is respected on the D1 timeframe, that level becomes of great importance to both short-term and long-term traders alike.

Even after the price breaks above or below that level, it is still important, only that the polarity reverses — a resistance level becomes a support level, while a support level turns to a resistance level.

More reliable price action patterns

One price bar on the daily timeframe represents all the transactions that took place on that trading day, including during news releases.

So, it captures the entire day’s volume of orders, which is more significant — the lower timeframes that may even be too small to absorb all the others from a high-volume trader. 

In essence, one daily timeframe price bar has a greater significance than a lower timeframe bar.

So, price action patterns that form on the daily timeframe will definitely be more reliable than the ones that form on intraday timeframes. 

A reversal candlestick pattern, like the pin bar, is more likely to lead to a reversal of a price swing in a daily timeframe than in a 5-minute timeframe because the price bar represents the market consensus for the whole trading day — a bullish pin bar shows that the momentum was with the bulls and may continue like that the next day.

Similarly, a chart pattern on the D1 timeframe is formed over a long period and represents the sentiments in the market during that period, unlike an intraday chart pattern that might only be noise.

Moreover, the price swings on the D1 timeframe are much larger than the lower timeframe.

On average, if an impulse swing on the daily timeframe is about 200 pips, that of the hourly timeframe is less than 40 pips. So, when a price action pattern works, you will be making more pips in a D1 timeframe than in an H1 timeframe. 

Less noise

Because a price bar on the daily timeframe takes more time to print, there is less noise on the D1 timeframe than on the intraday timeframes.

A choppy price movement, especially during news releases, on an M15 timeframe is swallowed within a single bar on the D1 chart.

Moreover, what we normally see as trends on the intraday charts are just pullbacks or even a single bearish price bar on the daily chart.

So, using the daily timeframe will help you to identify the predominant market trend and avoid the temporary countertrend movements that constitute market noise.

Trading gets easier when you stay on the side of the trend —you make fewer mistakes, and even when you do, there is a lower chance that the price will move significantly against you before reversing to continue in the trend direction.

Top-down approach to trading

Even if you want to make use of the lower timeframes to refine your trade entry, there is a need to take a look at the daily timeframe. In fact, you should use a top-down approach — starting your technical analysis from the higher timeframes and go down to the lower ones. 

That is, if you are an intraday, it’s best to start your analysis with the daily timeframe to spot the main trend and the most significant support and resistance levels.

Mark them well and then step down to the intraday timeframes — H4, H1, M30, M15, and the rest — to continue your analysis.

This way, you can filter out the not-so-good setups on the lower timeframes — for example, setups that occur against the trend or directly into a support or resistance level on the daily chart.

For swing and position traders that normally make use of the daily timeframe, it would make sense to start analysis on the weekly timeframe and then step down to the daily timeframe to spot a better entry level. 

This is known as multi-timeframe analysis or top-down analysis, and it is considered the best method of technical analysis.

Relying on one timeframe is like trading with a handicap because you are missing some vital information you would have got from another timeframe, especially the daily timeframe.

Lower trading cost

One thing intraday and high-frequency traders don’t realize is that trading costs matter and quickly add up to a lot.

In fact, the cost can be the main difference between winning and losing in this game. Trading the daily timeframe helps you to reduce the cost of trading, and here is how.

As we stated earlier, the D1 timeframe offers bigger price swings, such that when you are trading it, you are aiming at a profit target of up to 200 pips.

In an M15 timeframe, you may be looking at a 20 pip profit. Since you pay the same spreads and commission, no matter your profit target, your cost of trading as a percentage of your potential profit is much higher when you are trading the M15 timeframe.

For example, if the broker is charging 2 pips spread per round trip, then you would be paying 10% of the 20 pips profit on the M15 but only 1% of the 200 pips profit on the D1.

Another way to look at the cost is the trading frequency. With a lower timeframe, not only are you paying a higher cost in each trade, but you also trade more frequently — meaning that by the end of a year, your cost must have accumulated to a lot.

Let’s take for example you have a $20,000 account and you are trading 1 lot per trade. For EURUSD, 1 pip is $10, so a 2 pip cost for buy and close would be $20.

If you trade 500 times in a year on the M15 timeframe, you will be paying $10,000 in cost, so you need to have made, at least, that amount, which amounts to 50% of your trading capital, to stay even.

Compare that to someone trading only 50 times in a year on the daily timeframe — the accumulated cost would have just been $1,000 or 5% of the trading capital.

Less leverage and lower risk

Trading is a very risky game — even with a stop loss, you can still lose more than you planned if the price gaps against your stop loss order — which is why you are advised to use minimal leverage because it can multiply your losses.

Because of the smaller price swings associated with the lower timeframes, traders often place bigger position size (huge leverage) to increase their profit potential when trading on those timeframes.

But it also increases their risk when things go wrong. Trading the daily timeframe forces you to use a smaller position size because of the need for a bigger stop loss. This effectively reduces your leverage and your overall risk exposure in the market if things go long.

To better appreciate this concept of leverage and risk, let’s say Trader X is short 1 lot of EURUSD with a 20 pip stop loss (a $200 risk) on an M15 timeframe and Trader Y is also short on the pair with a 100 pip stop loss (a $200 risk) on the daily timeframe. In both cases, the dollar risk at the stop loss is the same ($200), but Trader Y is using a fifth of the leverage used by Trader X.

If the price were to gap up by say 150 pips due to a political event in the US or EU, Trader X would have lost $1,500, while Trader Y would have lost only $300. Thus, the daily timeframe forces one to use less leverage and reduce risk exposure.

More time to make trading decisions

Trading the daily timeframe gives you enough time to analyze the market and make better trading decisions, and you know why — it takes a full trading day (8 or 24 hours, depending on whether you are trading the stock or forex market) for a D1 price bar to print.

So, you have all that time to analyze the previous price data, make a decision, and implement your decision.

Compare that to a timeframe that prints a new price data every 5 or 15 minutes — you have just those few minutes to analyze the implication of the new price data and decide whether to place a trade, hold your position, close your position, or stay out of the market entirely.

This does not give you enough time to think, so you are more likely to make wrong decisions. Moreover, it can be pretty stressful to stay glued to your screen, monitoring the market.

Patience to avoid overtrading

When you are trading the lower timeframes, you run the risk of overtrading — a psychological need to always be in the market even when there are no good trading opportunities.

Some have that addiction to stay active in the market or frequently getting in and out of the market. 

There are also some that like to micromanage their trades, constantly watching, analyzing, and adjusting their positions.

Whatever the case, overtrading is counterproductive and leads to irrational, emotion-based trading and poor trading results, which can wipe out a trader’s capital in the long run. 

Trading on the daily timeframe helps you to be patient with the market because the price bars take a longer time to form.

You only need to analyze the market at the end of the day when the price bar has closed or the beginning of the next day. It also helps if you can use the ‘Set and Forget’ trade management style.

Freedom to do other things

Apart from the patience it teaches you and the time it affords you to make key trading decisions, trading on the daily timeframe gives you the freedom to live life outside your trading room, away from the screen.

The price bar prints once a day, and you take 30 minutes or 1 hour to analyze the market for that day — the rest of the day is yours to do what you want.

You can spend time with family and loved ones, go shopping, or go play golf — whatever you want! If you want to have multiple streams of income, you may even have a job that earns you more money.

The fact is that with the daily timeframe, you are no longer a slave to the markets — you get your freedom back.

Part-time allows you to build your account

Just like we stated above, if you are trading the daily timeframe, you will probably be spending between 30 to 60 minutes each day on the market on most days.

What this means is that you can actually combine your trading with a fulltime job that fetches you good money to sustain your lifestyle.

With such a job, you are not trading to make quick money to pay bills and take care of your feeding, which can cause you to make some account-blowing errors, like trading without a stop loss.

You trade to become a better trader and build your trading account. Trading with such a relaxed mind puts the odds in your favor.

You simply sit and watch your account balance grow. As a matter of fact, you can quietly grow your wealth over the years by reinvesting your trading profits and adding more money yearly to your trading account from the savings you made from your wages.

For example, let’s say you started trading with $5,000, and you add an extra $5,000 annually to your trading account for the next 20 years.

 If, on average, you make 20% of your trading capital as profit each year, by the end of the 20 years, you would have grown your account over 1.3 million dollars. 

Different ways to trade on the daily timeframe

Apart from using the daily timeframe to perform multi-timeframe analysis when trading on the lower timeframes, there are basically two trading styles you can trade off the D1 chart — swing trading and position trading.

Swing trading

This is a trading style that seeks to profit from the market by capturing one price swing at a time — whether the market is ranging or trending.

The point is swing traders don’t want to be in the market when a pullback (opposite swing) starts; they would rather stay out of the market when the opposite move starts and wait for another opportunity to snipe another impulse swing.

Most tradable price swings on the daily timeframe last from days to weeks, so swing traders don’t have to monitor their trades all day long, which affords them the time to get another job or have more time for family and friends.

On the downside, swing traders are exposed to overnight or weekend price gaps, and they don’t get to ride a trend to its completion.

Position trading

Being a long-term style of trading, position trading tries to ride the market trend to its completion, exiting only when there is enough evidence that the trend has reversed.

Position traders often perform their analysis on the weekly and daily charts, but usually use the daily chart to find better entry levels. 

This kind of trades can last for several months and requires less than 30 minutes each day to monitor.

People with full-time jobs can easily combine their jobs with position trading. However, with this method of trading, you may win far fewer trades than you lose, and it’s not uncommon to watch winning trades turn to losers — though, for winners, the reward/risk ratio is usually more than X10.

When the daily timeframe may not useful

Despite how important the daily timeframe is, there are occasions when it may not be useful to trade off the D1 chart, and these are some of them:

When you want to scalp the market: The daily timeframe is slow-paced — prints a bar per day — so, it is not the timeframe for high-frequency traders.

It allows you to trade profitably without watching your screen all day. But if you must scalp the market, you need to go to the lowest timeframes — 5-minute, 1-minute, and tick charts.

When you live off your trading income: If you depend on your monthly trading income to pay your bills and take care of feeding, the daily timeframe may not be for you, as it may not allow you to generate the consistent income you need. It is not uncommon to have several months without profits when trading on D1 charts

If you are a proprietary trader: Proprietary traders try to make as much money as they can in the shortest possible time because what they earn depends on how much they make.

So, they tend to trade quite frequently. For such fast-paced competitive trading, the D1 timeframe may seem too slow.

Important trading tips you should know

To succeed in trading, you need more than just a trading strategy. There is a need for a robust trading plan that details when you trade, the markets you trade, how you execute your trading strategy, and the way you review the records of your trades.

Creating your watch list of markets

The markets are closed on weekends, so you can use that period to go through the various markets to find the ones where possible trade setups — based on your trading strategy — may be forming and add them on your market watch list. 

During the week, you keep checking those markets that made it to your watch list to find the ones whose setups have completed so you can trade them. 

When you trade

As someone who is trading the daily timeframe, you need not bother about the volatility differences in the different market sessions — Asian, European, and North American.

All that matters to you is to analyze the market and make your trading decisions at the close of the day’s price bar.

The close of the American session is considered the day’s close, so, depending on your location, the day’s close could be in the evening (North America), close to midnight (Europe), or morning (Asia).

If you are in Europe, do your analysis around 11 p.m. GMT and look for potential trading opportunities or check how your trade is doing with reference to the new price data that has just been printed.

Trade execution and records

Once you place a trade in any market, it is important to record the necessary details about the trade. These are the common details you need to record:

  • The market you’re trading
  • The date you entered your trade
  • The timeframe of entry
  • Trade setup used
  • Your position size
  • Entry price level
  • Your profit target
  • The pips value of your stop loss 
  • Dollar amount risked
  • The reward/risk ratio
  • Reviewing your trade records

    After a series of trades — say 30 or 50 trades — you will have to review your trade records to know if your strategy still has an edge in the markets.

    You must use a consistent sample size — if you are using 30 trades, then do your review after every 30th trade, and if you are using 50 trades as your sample size, do your review after the 50th trade. 

    During each review, you will need to calculate your strategy’s expectancy, which is given as

    Expectancy = (% of winners X Average win) – (% of losers X Average loss) – (Commission + Slippage)

    If your strategy has a positive expectancy, that is great, but if not, you will have to review your trading strategy and tweak it a bit. 

    Even with a positive expectancy, if the value is not too good, you may have to tweak your strategy to make it better.

    After completing another sample size of trades, you review your trades again to know if you still need to tweak your strategy.

    Final words

    The daily timeframe is about the most useful trading timeframe among traders because it shows what happens in the entire trading day.

    It offers a lot of benefits, and even intraday traders use it for multi-timeframe analysis. If you are a swing or position trader, it may be your timeframe of choice, as it affords more time to do other things, including taking a full-time job.

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