Which Time Frame To Use?

In the Day Trader vs Swing Trader post we have seen two charts, the first one based on 15 minutes and the other one based on 4 hours. This is basically two different time frames for two different kind of traders. Defining what kind of trader you want to be is essentially based on the time frame you choose. The reliability of signals, the frequency of opportunities and your schedule are factors to take into account.

 

Low Time Frames

As you can see on your trading platform, you can choose from very low time frames such as the 5 minutes and 15 minutes, to very high time frames such as the weekly and monthly.  Depending on your objectives and constraints, one or another will be more suitable for you. I strongly advise you not to use the 1 min chart, it’s a complete suicide and really you should just go to a casino. Let me show you the pros and cons of low time frames from 5 minute to 1 hour:

Pros

  • Getting more signals, more trading opportunities.
  • Allowing to time your enters and exits more precisely.
  • Spotting trend reversals earlier.

Cons 

  • Too many signals.
  • More prone to false trading opportunities.
  • Much more stressing.
  • Can quickly lead to a gambler behavior.
  • Can be very erratic and volatile during news.
  • More chances to see you stop loss triggered.
  • A lot of market noise.

A 5 minutes charts. The box is just to show you the same zone in a higher time frame in the next chart. If your signal is based on the price crossing the SMA20 you would have had a lot of true/false signals.

High Time Frames

A time frame is considered to be high from the 4 hours to the monthly charts. These time frames allow you to have a bird view of the security to quickly spot major supports and resistances as well as the trend. The higher the time frame, the more reliable the signals are.

Pros

  • Signals and trading opportunities are much more reliable.
  • No need to stay in front of the screens during the whole day.
  • Giving a quick overview of the security with major supports/resistances/trends/retracements.
  • Allowing to catch big waves, stay longer in a trade and increase your profit.
  • Price movements are more meaningful.
  • Less risks to see your stop triggered by erratic moves.
  • Less prone of emotional actions, more time to think.
  • Avoiding over trading.
  • Increasing your chances to be profitable.

Cons

  • Need patience, but patience is the key.
  • Drawdowns can last for several days giving you more time to move your stop loss or close your position prematurely.
  • Trade off between holding time and reward.
  • It’s possible to have no signals during a week.
  • The risk when keeping positions over the weekend.
  • Rollover fees.

A 4 hours chart. The gray box is the same as the one shown in the 5 minutes chart. As you can see, you get far less signals, even no ones here but you would possibly have caught the big move from the bear candle crossing below the SMA20 and still be short.

Which time frame should I choose?

As shown above, it depends on your personal goals and psychology. You have to choose the time frame where you will have enough opportunities to trade without losing your patience and the time frame having the right trade off between the holding time and the expected reward.

Personally I prefer to use higher time frames to have less signals but more reliable ones. I usually use the daily time frame to spot major supports/resistances/trends, then the 4 hours time frame to spot medium  supports/resistances/trends and finally, the 1 hour chart to locate the precise trade entry points. As you will see in a future article, trading with multiple time frames is a must.

If you want to be a day trader you will more likely stick to the 5 minutes/15 minutes time frames whereas if you want to be a swing trader you will more likely use the same time frames as mine. Just don’t forget that to be a profitable trader, you don’t have to trade 10 times a day, just 1-3 high probability trades in a week can be enough. The key is the patience. If you are naturally excited when you win and frustrated when you lose, I definitively advise you to avoid trading using low time frames.