As we all know, currency pairs can be traded in various time frames such as 5, 15, 30 minutes through to 1, 2, 4 hours etc. Each trader has their own preference due to many reasons such as a difference in profit target or the amount of trading they wish to do. For instance, if a trader is using a 4h time frame they don’t have to do much trading as a new session starts every 4 hours. However, if they are trading on a 5 minute chart they will certainly need to look at the screen more often.
Disadvantages of a single time frame
As traders, we seem to develop a relationship with a particular time frame and stick to it for the rest of our trading days. Whilst this is a good way to trade it can have its disadvantages.
The strategies that you learn on your Forex trading course may be effective across all time frames, including the daily charts. At the same time, there are various factors out of your control that can change the direction of the market – mainly news alerts. However, you may find yourself in a situation where the news is quiet, your set up is good but the market starts turning into the opposite direction. This is when you are scratching your head and really trying to think where did you go wrong?
The truth is you were not – if you are focuses solely on the time frame you are trading. However, if you look at a completely different time frame, you may find out that you shouldn’t have taken that trade. For example, on a 1 hour chart, your trade seems perfect and you have set it up exactly how you were shown to, when you started to learn Forex trading. However, if you reference the 4 hour chart you may see that the trend is actually going in the opposite direction overall. This means that you are trading against the overall trend. You may have simply caught a consolidation period in the opposite trend which is why the set-up seems perfect in the 1 hour chart.
Be careful. Always reference the higher time frames to confirm that you are right. Higher time frames should be used as a guide that shows you in which direction you should trade with your strategy. If the higher time frame is consolidating, be patient and let it find its way. The main lesson to learn here is that you need to follow the overall trend to increase your chances of success. If you trade against it, you may get lucky but this is not a game where you want luck to control your outcome.