Should You Use the 4-Hour or Daily Time Frame (or Both)?

Happy Friday!

This week’s question comes from Marguerite, who asks:

Which is better to use, the 4-hour time frame or the daily?

It’s no secret that I favor the higher time frames. I’ve found them to be far superior in every way compared to something like the 15 minute or even 1-hour time frames.

But which is better, the 4-hour charts or the daily?

The answer to that question depends on several factors. However, I can tell you that I favor one over the other.

In fact, I even recommend that novice or struggling price action traders begin with one and then eventually move onto the other.

By the time you finish reading this post, you will know which one I favor. I will also share how you should progress between the 4-hour and daily time frames. We’ll even discuss how I use the weekly and monthly charts.

Let’s get started.

Most traders I speak with tend to believe that the daily time frame is reserved for those with large trading accounts. This is probably due to the larger stop losses that the daily charts demand.

However, larger stops do not equate to more risk. You simply need to adjust your position size accordingly.

This idea that the daily charts are reserved for the big hitters leads most traders to the smaller time frames. Even those who have joined my community and know I trade the 4-hour and daily charts tend to start from the wrong end.

What do I mean by ‘wrong end’?

A trader faced with either the 4-hour or daily time frames will usually choose the former. The thinking is that once they are profitable on the 4-hour they can move to the daily.

That’s the wrong way to go about it. In my experience, the daily charts are far easier to trade than any others, including the 4-hour charts.

There is a very good reason for that and it comes down to liquidity. You see, the more liquid a market is, the better it responds to technical levels.

A 24-hour candle contains more volume than a 4-hour one, right? So which one do you think produces the better signals?

Therefore, if you have been struggling to trade price action on anything lower than the daily time frame, I know one reason why.

Commit to trade from the daily time frame and nothing else for a month. I can all but guarantee that you will find more reliable signals than ever before.

Usually when I mention how higher liquidity can mean more reliable signals, someone inevitably asks about the weekly and monthly time frames.

You know what? That thought process makes perfect sense.

After all, if a daily candle contains 24 hours of volume, wouldn’t a candle with 120 hours supersede it?

How about a monthly candle with 480 hours?

Yes and no. On the one hand, I like to use the weekly and monthly charts as a ‘big picture’ guide. By that I mean that a weekly pin bar or engulfing candle can signal a move higher or lower for the week ahead.

However, I don’t trade directly from the two time frames. In other words, I don’t open and close positions based on weekly and monthly signals or levels.

I do, however, use them when identifying key levels. It’s particularly useful when viewing the last few years of price action for a market.

I also pay attention to pin bars and engulfing candles that form on the weekly and monthly. If I find one, I will move to the daily chart to fine tune my levels and develop a plan for the week ahead.

Here’s how that works:

Notice how the bullish pin bar on the monthly chart above formed at a key support level. There was even a bearish pin bar several months prior that led to a multi-month decline.

Once I’ve identified the bullish pin bar above, I start to formulate my plan for the coming week.

Here’s how the daily chart looked shortly after that monthly pin bar formed:

The downward sloping flag pattern above shows how we could have entered on a retest of the area as new support.

Now, this isn’t just me pointing out something that has already happened. We traded the USDCAD setup above. You can see the commentary here.

In summary, I use the weekly and monthly time frames to help identify key levels and signals and then drop down to the daily to find favorable entries. I don’t always do this, but when it makes sense as it did with the USDCAD, it can be incredibly effective.

Both the 4-hour and daily time frames can be exceptionally advantageous for the price action trader. I use both when trading the Forex market, though I do favor the daily time frame.

A common mistake traders tend to make is to start on a lower time frame such as the 15-minute or 1-hour charts. They believe that a higher time frame like the daily is reserved for those with large trading accounts, but that simply isn’t true.

If you’re just starting out with price action you should try to stick to the daily time frame. Only once you’re able to turn a consistent profit should you consider moving to the 4-hour charts.

The reason for this is a matter of liquidity. There is more trading volume in a 24-hour candle than a 4-hour one. As such, signals that form on the daily chart tend to be more reliable.

Don’t forget about the weekly and monthly time frames. Although you may not want to trade them directly due to the long holding periods, they can offer hints about where a market might be headed.

I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.

To do that, I need your help.

Here’s what you can do to get involved and have your question answered in next week’s post:

1. Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
2. Help me answer questions. If I missed something or if you have something to add, don’t hesitate to leave a comment below.