Definitely one of the most frequently asked questions among newbie traders, the best timeframe for your trading is one thing you have to figure out on your own.
Different people have different needs and personalities, so what matters is finding out what your preferences are and choosing a timeframe that matches your personality.
Are you someone who likes the excitement that comes with quick, fast-paced activities and can make decisions quickly in the heat of the game? Maybe, you’re suited for the lower timeframes.
If you are the type that likes taking things slowly and thinking it through before making decisions, you are probably suited for the higher timeframes.
You see, one of the reasons newbie traders fail is that they usually trade the timeframe that does not match their personality, which is why we are treating the topic today.
In this post, you will learn:
- What a timeframe means
- Factors that determine the timeframe you trade
- The different trading styles and the best timeframe
- Why we prefer the higher timeframe
- Why new traders don’t like the higher timeframes
- Multi-timeframe analysis
The best timeframe: what does a timeframe actually mean?
At the most basic level, a timeframe represents a trading session of a specified duration, which could be one minute, 30 minutes, a day, or even a month. In other words, it is the time it takes for your chart to print a price bar.
So, if you set your chart on the one-minute timeframe, it prints a price bar every minute.
Similarly, if you set it on the monthly timeframe, it prints a price bar every month, while on the daily timeframe, it prints a price bar every 24 hours in the case of the forex market or by the end of the day’s market close in the case of the stock market.
In essence, the timeframe you set your chart on will determine how often it generates price data, which you need for your analysis of the market.
Hence, it determines your trading decisions — when you enter a trade, how you manage the trade, when you exit the trade, and how much profit you can make from a trade.
On the one-minute timeframe, you have to be analyzing and making your decisions by the minute, while on the daily timeframe, you have a full day to analyze the price data before a new one prints.
Furthermore, the timeframe you choose determines the size of the individual price bars and, consequently, the size of the price swings, which is what you try to profit from. The implication is that the higher timeframes you are trading, the bigger your stop loss and profit targets.
What are the available timeframes?
Generally, the number of timeframes naturally available on your chart depends on the trading platform you are using.
On the MetaTrader 4 (MT4) trading platform, which is the most widely used timeframe among forex traders, there are nine standard timeframes:
Here, the timeframes above the 1-hour timeframe are considered the higher timeframes, and those include the 4-hour, daily, weekly, and monthly timeframes.
The 1-hour, 30-minute, 15-minute, 5-minute, and 1-minute timeframes are considered the lower timeframes or intraday timeframes.
Apart from these timeframes, you can create more timeframes with a script in the platform known as PeriodConverter.
Simply input the period multiplier factor you want on the appropriate timeframe, and you will get the timeframe you want.
For example, you can create a 10-minute timeframe by using a multiplier factor of 10 on the 1-minute timeframe or 2 on the 5-minute timeframe.
Similarly, you can create an 8-hour timeframe by using a multiplier of 2 on the 4-hour timeframe or 8 on the 1-hour timeframe.
Some platforms have a different set of timeframes by default, including the 2-hour, 3-hour, 6-hour, 8-hour, and 12-hour timeframes.
TradingView, for example, has 3-minute, 45-minute, 2-hour, and 3-hour timeframes in addition to the nine standard timeframes in the MT4.
Factors that will determine the best timeframe you choose
There are several factors to consider when choosing the timeframe to trade, and these are some of them:
Your trading personality
This is probably the most important factor that determines the timeframe you trade. It is crucial that you trade the way you are comfortable with.
Thus, you should study your personality and identify your strengths and weaknesses. Then, choose the timeframes that utilize your strengths and avoid your weaknesses.
So, if you like to feel the pulse of the market, enjoy the stress of working in a high-pressure environment, can make trading decisions very fast, and quickly implement your decisions without emotionally sabotaging yourself, trading the lower timeframes may be right for you.
But you must be able to stay cool and know how to cut losses quickly without feeling so bad that you miss the next trading opportunity or too angry to take revenge on the market.
Even on the flip side, the excitement of a winning trade shouldn’t push you to start trading indiscriminately — jumping the gun.
On the other hand, if you are the patient type who likes taking time to think things before making a decision, the higher timeframe is best for you.
Additionally, if you have the tendency to overtrade or lose your emotional control, it is even more reason to stick with the higher timeframes.
With the higher timeframe, price bars are printed slowly, and you are forced to wait for the signals to appear, which don’t occur quite often, thereby reducing your tendency to overtrade.
Moreover, you have all the time to analyze the market before making a trading decision, so it reduces the chances of making the wrong call.
How much time you have for trading
One of the main factors that will determine the timeframe you trade is the time you have for your trading.
If you are a fulltime trader and have all the day for trading, you can trade the lower timeframes since you can afford to watch your screen all day.
But if you are a busy person — probably have a fulltime job elsewhere — and trading only part-time, you may have to choose the larger timeframes where you don’t need to analyze the market that often or monitor your trade all day.
With the higher timeframes, you may only trade a few times a week, but you will be catching the bigger price swings when you win.
Daily volatility changes
The lower timeframes are more susceptible to the effects of volatility changes in the market than the higher timeframes.
In the forex market, some of the events that cause daily volatility changes in the market include political news/events, economic data releases, and the open of major market sessions, such as the London Open and the New York Open.
To be able to trade the lower timeframes effectively, you need to be aware of those events and take them into consideration in your trading.
You must keep an eye on your economic calendar and the news feeds and decide whether to stay out of the market during high-impact events or do the opposite — trade the event.
If you are trading the higher timeframes, you won’t need to bother about most of those events, as their effects get swallowed in a single price bar, and the bigger stop loss used when trading these timeframes reduces the chances of getting knocked out.
The only exceptions are those events with long-lasting economic and political effects, such as Brexit and U.S. presidential elections.
Cost of spread
Trading on the lower timeframes comes at a higher trading cost, and here is why. The price swings and trends in the lower timeframes are smaller so the profit potential of any trade made on the lower timeframes is smaller than that of a trade on the higher timeframe.
Of course, for any given financial instrument, you pay the same spread irrespective of the timeframe you trade on.
Thus, with a lower profit potential on the lower timeframe, your spread, as a percentage of your profit, cost more.
Furthermore, you make more trades when using the lower timeframes than when trading the higher timeframes, so in a month, you accumulate more spread cost.
Different trading styles and their best timeframe
As a consequence of all the factors we have discussed above, traders tend to adopt trading styles that suit their personality and trading objectives.
Generally, there are four trading styles based on the timeframes used and the duration of trades.
This is a style of trading where a trader tries to capture small price movements. The trades usually last from a few seconds to some minutes, and several of such trades can be made over the course of the day.
Traders who make use of such styles are called scalpers. They are high-frequency traders who often make use of algorithmic trading.
The timeframes for scalping are mostly the 5-minute and 1-minute timeframes, but sometimes, a scalper may step up to a 15-minute timeframe to find a better trend or make use of the tick chart — a non-time-based chart that prints a price bar when the specified number of transactions have occurred — for better entry points.
Day trading is a style of trading where a trader opens and closes his trades within the same day, so the trades are not exposed to overnight price gaps.
Traders who trade this way — day traders — often try to benefit from the main price move of the day and have to monitor their positions frequently, else the price reverses against them and put them in red.
The best timeframe for this style is from 1-hour and below. Most times, day traders look for a trend on the 1-hour or 30-minute timeframe and step down to 15-minute or 5-minute timeframe to look for better entry levels.
With swing trading, traders try to benefit from the individual price swings, especially the impulse swings on the daily timeframe for a market in a trend.
A swing trader, as they are often called, can hold his trade from a few days to some weeks — as long as it takes the swing to complete.
Swing traders identify the trend on the daily timeframe and may step down to the 4-hour timeframe to pick better entry prices.
For a market in a range, a swing trader can trade the upward swings from the lower boundary and the downward swings from the upper boundary.
Also known as long-term trading, position trading involves riding the long-term trend to its completion.
This kind of trades last from months to years, and it’s suitable for the very patient traders who can afford to leave a trade open for that long, with all the associated risks — overnight price gaps and sudden price reversals.
Position traders often use a combination of fundamental and technical analysis to determine the right moment to enter a position.
On the technical side, they mostly make use of weekly and daily timeframes. They analyze the weekly timeframe to clearly spot the long-term trend and then step down to the daily timeframe to get a better entry level. But some may trade solely off the daily timeframe if the trend is clear enough.
Why we prefer the higher timeframe
From our discussion so far, it’s clear that there is no best timeframe for trading — you, alone, can determine what suits you the best.
However, we prefer to use the higher timeframes, especially the daily and the 4-hourly timeframes.
We prefer to do our analysis and spot trading opportunities on the daily timeframe and then step down to the 4-hourly timeframe to find good entry points.
Here are the reasons why we mostly make use of these timeframes:
- Trading less frequently
- Easy to find the predominant trend
- Better trade setups
- Bigger price swings
- Less sensitive to high-impact news
Trading less frequently
One of the salient benefits of trading the higher timeframes is that you get to trade less often than you would if you’re trading the lower timeframes since the setups take a longer time to form on the higher timeframes.
While making fewer trades may seem like a bad idea, it actually helps you to minimize cost and control your tendency to overtrade.
And, you will have more time to analyze the market, reducing the chances of making mistakes.
Easy to find the predominant trend
Most times, the most important trend in the market is the one that you see on the daily timeframe.
The timeframe shows you the price action of more than one year at a glance, so you can easily make out the direction of the predominant trend if there is one. As the saying goes, the trend is your friend, so you should always seek to be on the side of the trend.
Better trade setups
Another benefit of the daily timeframe is that you can easily identify the key support and resistance levels.
These price levels are usually monitored by many traders, including intraday traders who trade lower timeframes, which is why they have greater significance than the support and resistance levels on the lower timeframes.
Price setups that occur at the support and resistance levels on the daily timeframe tend to have better odds of success.
Bigger price swings
Price setups, such as reversal candlestick patterns, that occur on the daily timeframe normally produce greater price swings, and the reason is simple: each price bar on the daily timeframe is bigger than a price bar on the 15-minute or 1-hour timeframe, so the price swings are invariably bigger.
Less sensitive to high-impact news
The higher timeframes are less sensitive to the impact of news than the lower timeframes.
Of course, the price range of a daily timeframe is far more than that of the intraday timeframes, so whatever effects a news release may have on the market is readily consumed within the day’s price bar as if nothing happened. When you are trading on the daily timeframe, you worry less about the immediate impact of news events.
Why new traders don’t like the higher timeframes
Despite the benefits offered by the higher timeframes, especially the daily timeframe, most new traders tend to go the way of intraday trading, and when you try to know why, these are the two reasons they give:
Higher timeframes require a bigger capital
Newbie traders often think that trading a higher timeframe requires a bigger trading capital, but this is completely untrue.
While having a bigger trading capital is not a bad idea, you can still trade the daily timeframe with your small capital.
Given, trading the daily timeframe requires a bigger stop loss, but you can cancel the dollar effect of a bigger stop loss by using a smaller lot size.
For example, if you normally trade 1 mini lot on the 30-minute timeframe with a 20-pip stop loss, you can trade 0.2 mini lots (2 micro lots) on the daily timeframe with a 100-pip stop loss or 0.1 mini lot with 200-pip stop loss and still risk the same $20 per trade.
Here is the formula for calculating the ideal lot size for your trade:
Ideal lot size = Amount at risk / (Pip value x pips at risk)
Where the pip value for EUR/USD = $10 for the standard lot, $1 for a mini lot, and $0.1 for a micro lot
Amount at risk = account balance x risk percentage
If you don’t want to calculate manually, there are many online calculators you can use.
They don’t like slow-paced trading
Some traders think that trading the higher timeframes is boring because price bars take time to print.
But the essence of trading is not for excitement; forex trading is a serious business and should be taken as such.
What should matter to any serious trader is how to master a strategy that has an edge in the market and effectively execute that strategy in a cool-headed manner without letting your emotions get in the way.
When you understand trading that way, you will get to appreciate the benefits of the slow-paced nature of the higher timeframes.
The slow pace is already a sort of circuit breaker on your emotions. If you are trading the daily timeframe, for example, you analyze the market after the close of each price bar, which takes 24 hours to print.
That is enough time to clear your head. Moreover, it takes several days for a trading setup to occur, and that, alone, can keep you from overtrading or impulse trading.
Multi-timeframe analysis: the best timeframe for you
While there is no universal best timeframe for trading — because what works for you may not work for others — the best approach to technical analysis of the market and spotting good trading opportunities is multi-timeframe analysis. But what does it mean?
The multi-timeframe analysis is a technical analysis concept that involves analyzing the market on multiple timeframes to see the whole picture of the market.
Most traders often use three timeframes —a bigger timeframe than the one you usually trade, your default timeframe, and a timeframe below your default one.
The ideal practice is to start with a higher timeframe to get a broad picture of the market and identify key price levels (value areas).
Then, you step down to your usual timeframe and observe the price setup that you want to trade — the idea is to make sure you are in line with the market perspective on the higher timeframe.
When you spot the right trade setup, you can step down to a lower timeframe to get a better entry price.
Let’s take an example of an intraday trader who usually looks for trade setups on the 1-hourly timeframe.
In this case, he would study the daily timeframe first to get a broad view of the market and identify key price levels and then get to the hourly timeframe to look for relevant trade setups around those key price levels.
After spotting a good setup, he can step down to the 15-minute timeframe to refine his entry level. See the GBPUSD charts below that shows a bearish setup around a resistance level on the daily timeframe.
There is no best timeframe for trading the financial markets; it all depends on you — what is right for another trader may not be the best timeframe for you.
Experiment with various timeframes on a demo account and find out what works best for you and stick to it. However, whatever timeframe you trade, always try to do a multiple timeframe analysis to get the full picture of the market in every situation.