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If you're new at trading and you look at your price chart, there's one thing that will pop into your head.
"What is happening!>?>@?!"
Well, here's a tip. There's a tool that can help you look at the price chart a little organized and clear, which is filtering your time frame.
In this lesson, you'll walk through the importance of time frames in making your trading journey a bit less confusing.
The forex market operates around the clock on weekdays. With this, there are tons of price action to be presented to market speculators.
Do they look at all the presented data at once?
Wouldn't it be too confusing?
Yes, that would be very confusing. However, they don't necessarily look at ALL the data (unless they want to!)
Traders can use time frames to filter the data they want to see and analyze. The time frame in your price chart is surely what you have in mind. It shows the chart data in the specific time frame you've chosen.
The time frame selection varies depending on the trading platform you use. But one thing's for sure: there will be second, minute, hourly, daily, weekly, and monthly time frames.
Assuming you trade in TradingView, your selection would mainly be 1 to 30 seconds, 1 to 45 minutes, and 1 to 4 hours. If you select a 4-hour chart, the trading platform will only show you the price action in the past 4 hours.
The rule of thumb in timeframe analysis is that the wider your timeframe, the more accurate the signals you're getting.
Why not use a shorter time frame? Wouldn't it be more appropriate if you're trading short-term?
Well, no. Firstly, the longevity of your stay in the market doesn't have any business with your timeframe analysis. Secondly, a short time frame will just subject your analysis to market noise and even false moves.
But that doesn't mean you should simply pick one long time frame, analyze it, and call it a day.
The best practice when analyzing the market price action is to ALWAYS look at multiple time frames to see the actual market movement.
Multiple time frame multiplies profitable returns.
I know analyzing one chart is hard enough. What more if you add different time frames? It would be too much of a headache.
However, those headaches will all be worth it.
With multiple time frames, you get to confirm signals and market movement, which eliminates the possibility of entering the market with a disappointing entry point.
John and Sean both want to go long on the EUR/USD. They both have the strategy of monitoring and analyzing the price action using the chart's time frame. However, their strategies differ from each other.
John is only planning to look at the 15-minute chart, while Sean is gearing up to analyze multiple time frames, specifically, the 15-minute, 1-hour, and 4-hour chart.
In the 15-minute chart, both John and Sean saw a 200-period SMA, as if testing the support. With this, John immediately enters a buying position to follow his analyzed trend.
On the other hand, Sean is yet to enter a position. He looked at the 1-hour and 4-hour chart. Upon looking at the two charts, Sean noticed that the price is at the top of the ascending channel, and doji is being formed at the resistance level, which suggests a sell signal.
With this, Sean enters a short position for EUR/USD, which is different from John's long position. After some time, the market moves to a downtrend, specifically following the patterns analyzed by Sean.
So, what happened? John runs at losses while Sean generates profit through their position. Is it based on luck? Coincidence?
Absolutely not. It's because Sean took time to look at and analyze multiple time frames, which helped him to see the actual market behavior and its potential movement.
For the next lesson, you'll learn to choose which time frame is best based on your trading goals and strategies.