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Ah, the age-old question – what time frame is best for trading Forex? If only it were enough to give you one answer and be done with the debate.
You see, every trader is different. Every one of us has different personalities and therefore different needs as human beings. And if there’s one thing I can say with absolute certainty, it’s that you must find a style of trading that fits your personality.
On the subject of time frames, some of us need the excitement that comes from trading in and out of the market multiple times a day, while others are okay holding one trade for days or even weeks if it means a profit is to be had.
This brings us to one irrefutable conclusion – the “best” time frame for trading Forex is the one that works best for you. In other words, there’s no right or wrong answer except what you deem to be right or wrong.
Surprised? I know that most “authorities” on the subject will try to convince you that what they believe to be the best is universally true. Well, I’m not one of them as I truly believe that this is something you need to experiment with to find what suits you best.
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So while I can’t tell you what the best time frame is for you to trade, I can tell you what has worked the best for me. I can also share with you what works best for the price action strategies that I teach.
So with that said, let’s get to it!
Before we get into all the juicy details, let’s first discuss the most basic topic – the time frames that are made available to you as a Forex trader.
There are nine different standard time frames available to you. I say “standard” because there are some variations out there that we’ll get into in a moment.
Those standard time frames are:
So even with just the standard time frames, you have a plethora of options to choose from. If that weren’t enough, there are some platforms that provide variations from these time frames to include the 6 hour, 8 hour and 12 hour. This list goes on, but those three are the most common variations you’ll find.
And if that weren’t enough, for those of you on MetaTrader (MT) you can even modify the default time frame available to you. You can change it to anything you can imagine.
But I do not recommend doing this. Nor do I recommend using variations such as the ones listed above. Here’s why…
Forget about everything I just said about modifying time frames in MetaTrader. You don’t need to do any of that to successfully trade price action. In fact, it will only hurt your chances of becoming profitable in my opinion.
By now you’ve probably guessed that I’m not a fan of any Forex time frame other than the nine standard time frames listed above – and you’d be right. I just don’t see the need for them and actually believe them to be counter-productive.
The reason price action works, or any style of trading that’s technical in nature, is because enough traders see the same thing at the same time, that’s it! For example, if enough traders are watching the same key level combined with the same bullish price action, chances are that market will rise as those traders begin to buy.
When you start to deviate from the most-watched time frames you start to isolate yourself from the rest of the trading world. As an example, let’s assume that 1,000 traders are watching a bullish pin bar form at key support on the 4-hour chart. But only 100 traders are watching a similar pattern form in another market on the 8-hour chart. Both markets have the same number of total participants.
Which pin bar do you think is more likely to succeed? If you said the one with 1,000 traders watching it, you’re right!
From experience, I can tell you that two of the best time frames to trade are the daily and 4-hour. This isn’t to say that you can’t be profitable trading a different time frame, but these two are what made me profitable as they work the best with the price action strategies I use.
There are four advantages to trading these higher time frames.
Although I’m sure I could come up with more reasons, these four are what really separate the higher time frames from all the others.
Let’s take a look at each quality in greater detail.
It goes without saying that the range (high and low) of each period on the daily chart is greater than each period on a 5 minute chart. What may not be so obvious is that this acts as a natural news filter. How does it do this? The easiest way to explain it is to observe two different moving averages. One shorter period and one longer period.
For purposes of this example, let’s pretend that the 10 period MA above represents a 5 minute chart and the 100 period MA represents a daily chart. Notice how much smoother the 100 period MA is? Now assume that your stop loss is on one side of each moving average in the two charts above at an equal distance from the moving average.
Which time frame do you think is more likely to hit your stop loss, the 5 minute or daily? I think we can all agree that the 10 period MA (5-minute chart) is more likely to hit your stop loss because it’s much more volatile and choppy.
This is because the higher time frame allows price action to “normalize” throughout the day. This creates a much smoother market to trade compared to that of the lower time frames. Because the 5-minute chart is made up of 5 minute periods, there isn’t nearly as much time for the market to normalize. This causes your stop loss on a 5-minute chart to be much more vulnerable during Forex news events than it would be on a daily chart.
As a general rule, the higher time frames are much smoother and consistent than the lower time frames.
Due to the fact that the daily chart allows you to see a greater period of time, it becomes much easier to develop a directional bias compared to the lower time frames. There’s a reason why traders who trade the lower time frames use the higher time frames to identify support and resistance levels. Why do they do this?
Because it’s much easier to identify key levels of support and resistance on the higher time frames. Not only that, but levels on the higher time frames carry more weight than those on the lower time frames. This is because there’s simply more time that goes into creating these levels. An example would be a key level that goes back 3 years on the daily chart vs a level that goes back 48 hours on the 5-minute chart.
Key levels of support and resistance on the higher time frames are generally more reliable than those found on the lower time frames.
The higher time frames generally provide better quality setups than the lower time frames. This is due to the fact that there are fewer setups on the higher time frames. For example, the pin bar may only occur once or twice in a single month on a given currency pair. Whereas you may find five to ten pin bars on the 5-minute chart within a 24 hour period.
Having fewer trade setups means more weight is placed on each one. This is because it stands out and becomes obvious to more traders around the world. And as we know, the most obvious price action setups are the most favorable setups to trade.
More often than not, a higher number of trade setups equals a higher percentage of false signals
Because there are fewer setups, you’ll be forced to trade less often. This may sound like a bad thing (I used to think so too), but it’s not. The less you trade, the more you open yourself up to opportunities. In order to see valid trade setups, your mind has to be in a neutral place. If you’re constantly taking trades and biting your nails with anxiety, you’re preventing the open mindset necessary to identify favorable setups when they occur. This open and neutral mindset can only come with trading less frequently.
The saying, “less is more” has never been as accurate as it is in the Forex market. You don’t need 20 or 30 trades per month to make good money in Forex. All you need is two or three great trades per month to make a considerable amount of money, even on the daily chart. This is especially true if you’re using a proper risk to reward ratio.
So now that we’ve covered each advantage of trading the higher time frames in greater detail, I’m sure you have some objections (I know I did when I first thought about trading the daily chart back in 2009). I can recall from my own experience that going from the 15 and 30-minute chart to the daily chart seemed crazy at first. I figured that there wasn’t much money to be had by trading a time frame that moves so slow. I was also nervous and skeptical about the massive stop loss I was going to need to do it.
If that sounds familiar then you’re in luck. I’ve listed two of the most common objections to trading the higher time frames below.
Below are two of the most common objections I hear from those who are contemplating trading from the daily time frame.
If you have enough money to open a trading account then you have enough to trade the higher time frames. You don’t need a $10,000 account to trade the daily chart. You don’t even need a $1,000 account.
Because of the leverage in the Forex market, even a $100 account can be used to trade the daily charts. It’s all about calculating the correct position size relative to your account size. Here’s the calculator I use.
It goes without saying that you’re not going to make $1,000 on a profitable trade when trading a smaller account. But you can trade the higher time frames and work your way up. If you follow solid advice and remain disciplined, it’s possible to build a relatively small account into a large one. The key is a “slow and steady” mindset.
Oddly enough, it can be harder to build a $100 account into a $1,000 account than it is to build a $10,000 account into a $100,000 account. This is because you’ll be tempted to risk more than you should on a smaller account to get there faster.
But then this is true regardless of the time frame you’re trading.
Only if making money bores you. Seriously, though. This brings up an important question you must ask yourself (and be honest) before you can ever become profitable.
Why are you trading Forex?
Is it just for the thrill and excitement? Or is it to make money? Most Forex traders I know are in it because they have dreams to one day trade full-time. If not full-time, then part-time to supplement their income in order to help support their family and go on vacations – to live a comfortable life.
If you’re trading Forex for the sheer challenge or excitement, that’s okay. But please only do so from a demo account. Trading real money in Forex for the wrong reasons is far worse than not trading at all.
So what’s the “right” reason?
Well, it all starts with what you want out of life. From there your “why” must manifest itself into a specific goal of how much you need to make from the Forex market.
For more on this subject, see the article I wrote here.
What time frame do you think is best for trading Forex?
Share your experience in the comments section below.
Justin Bennett is an internationally recognized Forex trader with 10+ years of experience. He's been interviewed by Stocks & Commodities Magazine as a featured trader for the month and is mentioned weekly by Forex Factory next to publications from CNN and Bloomberg. Justin created Daily Price Action in 2014 and has since grown the monthly readership to over 100,000 Forex traders and has personally mentored more than 3,000 students.Read more...
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