Time Frames In Trading Explained

Part 8.1 Technical Analysis. Trading Time Frames
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We can define technical analysis as the study of price over time and the resulting patterns that form on a chart. The first thing to ask then, is what time frame should we be looking at?

Well, there is no single answer to that, traders will use a variety of different time frames depending on their trading style and strategy and how long they intend to hold their trades for.

In this article we will give you an overview of the most popular time frames for trading and the factors that impact that choice.

Table of Contents

What Do We Mean By Time Frames In Trading?

First of all what do we mean by time frames? Well there are two ways of looking at this. The first is the length of time over which you will hold a trade or investment.

The second is the time frame of the charts that you will use to analyse the markets and determine your entry and exit points. The first will determine the second.

Traders that are looking to hold a trade for less than a day – Day Traders – (the clue is in the name) will typically use the lower time frame charts for trading and traders that hold trades for a day or more, such as Swing Traders will use higher time frames of 1-4 hours or more.

If you are a long term trader that only makes a few trades a month then it makes no sense to spend hours watching a 1 minute or 5 minute chart tick by, it won’t give you the overview needed to make good decisions and the same applies to a short term trader using a daily chart.

What Is The Importance Of Time Frames In Trading?

This is important for three main reasons:

  • Timing of your entry and exit points
  • Position sizing
  • Your personal circumstances and trading psychology

Timing Of Trades, Volatility is Key

In our article on the topic of, we explained the differences between these approaches and its effect on time frame and timing decisions.

A key consideration is volatility. Volatility is effectively the price range of an asset over a period of time. Volatility is more of a risk in the short term and can easily take you out of a trade.

Volatility is effectively the price range of an asset over a period of time.

Whereas in the long term, volatility is less important in timing of an entry as you will be playing the longer term trends.

The next consideration – position sizing – is intimately linked to the timing of your trade.

Position Sizing

There are two things to consider here. This first is risk and leverage (read more in our article on Trading vs Investing). If you are trading over the short term, you are more likely to be doing it for income and will be looking to profit off smaller market movements.

This will require you to use some leverage. Leverage is a way of increasing your returns by increasing your risk. It is very useful for short term traders and is offset by the lower timeframe.

What is Leverage?
Leverage is trading with money you don’t have, like taking out a short term loan. Brokers take a deposit from you – this is known as margin and then loan you a multiple of that amount with which to trade.

However, if you use this type of leveraged position sizing for a long term trade, you will be much more likely to be stopped out of a trade due to volatility in the market, even if the price action eventually moves in the right direction.

For long term traders, the opportunity cost of money becomes a potential issue. Due to volatility, in long term trading you cannot use as much leverage.

This means that you will need to put more of your capital into that trade, effectively tying it up for a period of time. The knock on effect of this is that you may not be able to take part in better opportunities that you may come across whilst your capital is tied up in the other trade (especially if that trade is in an illiquid asset).

Your Personal Style, Circumstances and Psychology

This is an often overlooked consideration but it can be the most influential in your success.

First of all, if we are talking about time – what time do you have to dedicate to market analysis and watching your trades? If you are doing a full time job then you are very unlikely to be able to be successful in keeping up with a 5 minute chart.

Another important factor is your own personality. Are you the type of person who can patiently wait for a long term trade scenario to play out despite it potentially going against you for a period of time then long term trading may be good for you.

If you are able to cut your losses and move on to another trade quickly then short term trading may suit you better.

These are questions that only you can answer and potentially will require some experimentation and honest reviews of your winners and losers to determine.

To read more about trading psychology have a look at this article in our Trading Basics Series: Trading Psychology.

Chart Time Frames - Basics

For those of you who are new to trading, let’s have a look at some chart timeframes so that you can see the difference between them.

Popular Time Frames

The most popular timeframes that are used are 1 minute, 5 minute, 15 minute, 1 hour, 4 hour, daily and weekly.

In these charts a new data point is drawn on the chart for each new period. As can be seen here, in the 5 minute chart each bar represents 5 minutes and in the 4 hour chart, each bar represents 4 hours.

Getting Perspective

However, no trader will only look at a single time frame. Traders can get different information from the charts at different times. Higher time frames are better for trends and lower time frames are useful for timing and confirmation.

As such, short term traders will often ‘zoom out’ to a higher timeframe to understand the underlying trend and long term traders may ‘zoom in’ to a lower time frame for confirmation of a move.

Despite the fact that you can use multiple timeframes, it is important not to confuse yourself by always jumping in between timeframes and trying to base a strategy on signals or patterns in different timeframes.

Chart Patterns In Different Time Frames

As we go over the core concepts of technical analysis in the following units, you should keep in mind that all patterns and indicators I will cover can form in any time frame.

And what you will find is that trends and patterns can actually contradict each other on different timeframes. As seen in these examples all these FTSE100 charts are taken at the same date and time but on different timeframes and trends especially will differ across different time frames.

I am not saying this to confuse you! It is just important to note that for a beginner it is better to pick a time frame to focus on for your main strategy and use alternate timeframes just for context or confirmation.

Summary

  • There are different time frames for both the analysis and trade holding time periods.
  • You should choose a chart time frame that suits your trading hold time. The length of time you hold a trade will depend a lot on your personal circumstances and psychology.
  • The time frame has a significant impact on your entry and exit timings and position sizing.
  • As a beginner it is best to stick to one time frame for your main analysis and only use other timeframes for confirmation or timing.

Our next unit will cover the different types of charts.

Resources

Free time frames reference PDF: The Most Popular Time Frames.

Read More: Technical Analysis Basics

This mini-blog is part 1 of our Introduction to Technical Analysis unit which forms part of our Trading Basics Series. This mini-blog consists of the following:

More Trading Basics

There is loads more to learn and we will uncover more terms in the rest of the Trading Basics blog series. Read our previous or next unit.

Justina Nothard

Justina Nothard

Hi, I’m Justina Nothard, a retail investor trading Stock Index Futures.

I understand how hard it can be for the ordinary trader to learn the basics and find useful tools and practical information.

This is why I decided to create Nothard Trading to help you take control of your trading.

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