We often get asked, ‘Which is the best time frame to look at for trading?’. Well, there is no one right or wrong trading time frame. Stock, Options, Futures, and Crypto markets exist in multiple time frames.
The key is to figure out which time period matches your trader personality. But regardless of whether you choose to trade on the daily, hourly, 15 min, 1 min, or even the 30-second charts, one thing remains constant- a trader should always know what is happening on the higher and lower time frames. What are the underlying trends? Are they consistent? How do they affect your current setup?
So the real answer to the question ‘Which is the best time frame to look at for trading?’ — Well, there is no one right or wrong time frame, because you need to be looking at multiple time frames.
We explain why and show you how multiple time frames can improve your trading decisions.
What Are Charting Time Frames?
A charting time frame is simply the time interval of your price candles. Each Candlestick represents the price open, high, low, and close of a particular time frame. So a one-hour candle is created every hour and represents one hour of trade data.
The important thing to understand is that candlesticks, chart patterns, and indicators can look vastly different depending on the time frame you are focussing on. Take a look for yourself.
Let’s say that we have two 5 minute candles.
The first candle is bearish. It closed lower than the open.
The second candle is bullish. It closed higher than the open.
When we combine the two 5 minute candles, we get a 10-minute candle that looks very different from the other two candles. This 10-minute candle encapsulates the trading data of the two 5-minute candles and looks more like a bullish hammer.
When we take a look at trading indicators, a 20 day EMA (Exponential Moving Average) on a 15 min chart looks vastly different from a 20 day EMA on a 4-hour chart. Bollinger Bands on an hour chart send different signals than Bollinger Bands on a 12-hour chart.
Candles will vary. Trend will vary. Indicator signals will vary. Not only will they vary, they can also be conflicting. This is where it can get confusing and why it’s important that you have a holistic understanding of what’s happening in your charts. You need a birds-eye view. By looking at a combination of time frames you can better assess what is really happening before making your trading decisions.
Which Time Frames Should You Trade?
With modern charting platforms, you have the option of looking at minutes, hours, days, weeks, and yearly time frames. With all these options, which do you choose?
Typically, new traders tend to zero in on one specific time frame while ignoring all the others. If you are currently doing this and it’s working for you, by all means, continue what you are doing. We are not here to tell you to switch up a winning strategy.
But if you’re getting faked out or not seeing your desired results, maybe it’s time to take your analysis a little deeper.
Larger Time Frames
Larger time frames are known to cut out the noise and give off more reliable signals. These longer-term trends are generally considered stronger and more important than short-term trends. For example, a repeated level of resistance shown on a monthly time frame is going to be more powerful than one found on a 15-minute time frame.
Shorter Time Frames
On the other hand, shorter time frames are polluted with noise. But if you look through the chop, shorter time frames can reveal important turning points and levels that higher time frames simply don’t show. This can be especially useful for timing trade entries and exits.
Finding a Balance
It’s all a balancing act.
If a scalper or intraday trader only looks at the short time frames, they run the risk of ignoring or not seeing the larger overriding trend.
On the flip side, if a swing or longer-term trader only looks at higher time frames, they may be missing the ideal entry and exit positions that can be spotted on shorter time frames. Losing out on entries with higher profit potential can make a huge difference to a trader’s bottom line.
However, the selection of the different time frames used is dependent on the style and personality of the trader. You need to discover what works best for you. You need to find your comfort zone. As you gain more and more experience, it will become increasingly apparent the style of trader you want to be. Do you prefer buying and holding for weeks or months? Or do you get a rush scalping by the pip? Does a 1 min chart leave you feeling rushed but does an hourly chart have you feeling bored? All these things will determine the time frame you should be trading on.
But regardless, when you do your technical analysis, it’s important to get into the habit of evaluating charts over multiple time frames. With multiple time frames, you get the best of all worlds.
Why Look at Multiple Time Frames When Trading?
By analyzing multiple time frames, traders can better understand the overall trend and instill greater confidence in their trading decisions. Trading, after all, is all about planning and risk management.
Time Frame Support and Resistance
If you are zoned in and focused on just one chart, you risk not seeing significant levels of support and resistance. Zooming out to higher time frames can help identify areas where price has been defended time and time again. Don’t be blindsided by these levels. Get in the habit of zooming in and out to give yourself a more comprehensive perspective of the chart.
Time Frame Confirmation
Longer-term time frames can help a trader confirm their trading hypothesis. When trends are not consistent over time frames, this is a warning and you need to adjust your strategy. Where your trade setup looks good across multiple time frames, this increases your confidence in the trade. Looking for confirmation and time frame continuity is just one more way of improving your odds and limiting your risk.
Time Frame Entries and Exits
Shorter time frames can help traders zero in on suitable entries and exits. By zooming in, traders can visually see the small intricate movements in price to better time their entries, stop losses and profit targets. Choosing the right entry can significantly increase the profit potential of a trade.
How To Use Multiple Time Frames in Trading?
So how do you incorporate a multi time frame approach and choose intervals that are right for you?
We like to use a three time frame approach when doing chart analysis. You can of course monitor more than three time periods, it’s your choice. However, in our view, three time periods should give you a broad enough overall picture of the market. Whereas, using more than three charts can feel a little cluttered. While less than three charts don’t provide enough information.
Main Time Frame
Ideally, you should start off with finding your main time frame. This is the time frame that is best suited to your trading personality.
If you like to trade by the minute and are only looking to move a few pips up or down, then there is little need to be trading off a monthly chart. The monthly chart will move too slow for your trading needs.
The same goes if you’re a long term trader. There is little use to be looking at the minute chart if you plan to hold for months. The minute chart can be so full of noise and chop, you risk exiting a position too early.
Take a look at the chart below for some helpful suggestions on ideal time frames for your style of trading. Trial them out to find the ones you are most comfortable trading with and the ones that serve you best.
Higher and Lower Time Frames
Once you’ve found the right time frame that matches your trading style and doesn’t leave you feeling overwhelmed or underwhelmed. The next step is to look for a suitable interval higher and lower to complement your main time frame.
When choosing your higher and lower time frames, they need to make sense. It’s a balancing act remember. You want the time frames to be close enough so that their signals are not too far away to be redundant. But far enough to show you the broad picture of the levels and traps near the current price action.
Knowing where the long term levels of support and resistance can be helpful in giving a trader an overall picture of the stock. However, these long term levels are only really relevant if the current stock price is approaching one of those levels. If the stock price is 100 pips away, these levels will only distract you.
The Time Frame Rule of Four (to Six)
To help strike this fine balance, we like to use a method called the ‘Rule of Four’. You start with your main time frame. From there, your higher time frame will be at least four times greater. Your lower time frame will be at least four times smaller than your main time frame.
For example, if a 15 min time frame is your main. The 1-hour time frame will be your higher time frame (because 15 x 4 = 60 mins). And 4 min will be your lower time frame (because 15 ÷ 4 = 3.75, close enough to 4. You get the drift).
The Rule of Four doesn’t have to be exact either. It’s flexible enough to work even if you multiply/divide by five or even six. The key is that you don’t want your time frames to be so far apart, they stop making sense.
Top-Down, Bottom-Up, or Middle-Out?
Once you have your time frames, the order in which you choose to analyze the charts is completely up to you. Some traders advocate the top-down approach. Others start from the smallest time frame and work their way up. While many start at the middle, go up to check longer term support and resistance, then go down to snipe entries. No matter the order, as long as you’re looking at your charts objectively, there is no wrong way.
However, it’s easy to be objective when the trend aligns on all the time frames. But what happens when there is a primary downtrend but also a short term uptrend or vice versa? This is when you have to be mindful of your own bias.
Top-Down For Beginners
If you are starting small and working your way to the higher time frames, a short-term upward trend can leave you thinking that the longer term downward trend will reverse. This is a risky move. Trading against the overall primary trend is rarely advised as it can be a huge trap for new traders. Especially those who don’t have a plan.
This is where a top-down approach can be helpful as it encourages new traders to trade with the long term trend.
If we take a top-down approach, the long-term time frame will be used to define the overall trend and long term support and resistance levels. Here you can make the trading decision to go long or short depending on whether the market is trending or trading in a range. Then you can use your main time frame for your trading signals, and find your setup. By zooming into the short-term time frame, you can better refine your entry, exit, stops, and profit-taking levels.
For example, for those who trade on the daily chart. You can start by looking at the weekly time frame then narrow it down to daily and then the 8 hourly time frames. When marking support and resistance, use different colors to signify different time frame levels. The more time frames you can align, the stronger your level of support or resistance. If any levels are not close to the current price action, remove them. They will only confuse you. If the stock price does dramatically jump, you can always redraw your lines of support and resistance. But in the meantime, keep your focus on levels that are close to price action. And pay even greater attention to levels that have shown strength.
Planning and risk management – that’s what successful trading is all about. To better understand your trades, you need to add dimension to your chart analysis. Tunnel vision will only get you so far. Put the odds in your favor and look at multiple time frames.
How Echelon 1 can help.
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