Trading the correct chart time frames is important, and almost counter intuitive to the new trader. This no nonsense, keep it simple approach will show show you what and when to trade.
Daily charts are high probability.
If you have been trading less than 6 months, or are making less than 20% a year clear profit then I highly suggest only trading the daily charts. The daily charts are the representation of the entire days action at a glance. Trading the daily charts comes with many benefits, for example a daily chart will show you the genuine direction of a trend. If you look at a 5 minute chart, you can almost certainly have no idea about the general direction of momentum. Once you start getting in to correct trades on the daily chart, say in a up trend you can stay in those trades longer and increase your risk reward by many times. Let me show you.
[The benefits of trading daily charts is you can stay in winning trades longer for more profit, depending on your definition of the trend you will exit once your trend line is broken]
Above we can the GBP / JPY daily chart, imagine you open your position on the first inside bar. Once the currency starts trading above your open position on the 3rd day you can start to move your stop loss in to a ‘trailing stop loss’. Which basically means you have a flexible profit target, you can simply keep following the trade in its upward momentum for sometimes months, and once it’s in this position you can never lose, and you will be guaranteed a certain level of constantly increasing profit. The trade above could have lasted from Jan to April, that’s 4 months of profit with out having to even think about it.
You don’t even have to be correct about when the market will change direction. Your trailing stop will just come in to effect once once the trend is broken and profit automatically taken. It means you can get away with being wrong about trades more often, your only risking a small amount on losing trades, but your letting your winners fly. You simply can’t do this on low time frame charts, you will be restricted to much shorter trades which means more spread, more time spent actually trading, more chance of getting in to a state of ‘overtrading’ and many other negative effects, I’ll show in disturbingly graphic detail bellow.
With higher time frame charts there is also less trading noise, so you don’t get so many false signals. It’s hard to fake the entire days trading of a whole currency pair, but on lower time frames you might see a valid set up only to be stopped out of the trade by a big player making a deal, and you have absolutely no control over that. Signals carry much more validity on higher time frames, and that’s exactly what we are looking for. High probability. The lower you go, the lower your probability gets.
4 Hour charts can provide added scope for experienced traders.
This is the only other time frame I would say is worth trading, providing you want a stress free life. The 4 hour charts should only be even looked at providing you have exhausted all of the daily charts, and really have nothing else left to do, and have been trading for at least 6 months in profit. They will provide valid set ups just with a lower probability. My philosophy is to just trade the highest probability trades possible, make sure every card is stacked in your favor. Anything else seems crazy.
1 Hour charts
There is an exception to the lose rules about trading only daily and 4 hour charts. When you are planning your trade, you can use 1 hour charts to get the best entry price. Use what you have learned about price action, support and trends to see where the best point of entry will be. For example if you see some channels on the 1 hour chart and you want to go long on the daily chart, aim to buy at the bottom of the channel, not the top. This will give you a better buy in price. This works with trends as well, if you see a solid trend on the one hour chart in the same direction as your daily direction, aim to buy on the touch of the trend to minimise the buy in rate. I wouldn’t recommend trading the hour charts as a staple of your trading strategy unless you have a good reason too.
All other chart time frames
There is nothing on this earth that can change a well tempered seasoned trading professional in to a Red Bull drinking, chain smoking, vein popping, bag eyed gambler than lower time frame charts. The really low times frames are traded by people called scalpers, they sit in front of 3 or 4 screens making trades that last a few seconds or a minuets. Hitting buy, sell, buy, sell, buy, sell all day every day. You can liken it to being in an asylum, its a world away from your dream of sitting on a beach with a laptop.
I want to make sure you don’t end up in this category and hopefully this real image will be all you need to be convinced. It was done by a scalper trader in Russia who had a bad day. That’s not red pen.
Treat the lower time frames charts like you would treat crystal methamphetamine. Not even once!
[Russian scalper trader trading lower time frame charts has a bad day]
Pro tip: When looking at chart to find a trade. start with the 1 day chart, and zoom out in MT4 until the last but one furthest setting to asses the general long term trend. Draw in any points of interest, or a trend line. Then zoom in to find the best place to ‘buy in’, usually on the touch the trend line signaled by a high probability indicator. Make sure the indicator is valid and enter with a valid entry point as shown in the indicator section. If you buy in to the long term trend in this way, you can hold your position in the long term with the ‘smart money’. These entry points don’t happen often so make the most of it when they do, and don’t sell out unless you have to. Getting back in the trade could take a long time. Don’t have a trading account? Compare forex brokers here.