One of the most common challenges for new traders is on identifying the right timeframe to trade. Most trading systems will let you shift between a 1 minute charts to yearly charts. The challenge for any trader is to find the best timeframe to use based on his strategy.
I had this challenge as well. This is because in a hourly chart, the chart’s moving average might be heading higher but in a daily chart, the moving average is moving up. In addition, the average directionally index might be at 34 in the daily chart but be 19 in the one hour chart. In fact, all technical indicators will show different results when used in certain times. In this article, I will explain a simple strategy on how to identify the right timeframe to trade.
The first thing you need to do is to understand the type of trader that you are. Are you a swing trader, day trader, or long-term trader? A day trader is one who opens and closes trades within a day. Swing traders on the other hand are people who open trades and hold them for a number of days. The long term trader is one who opens a trade and holds it for weeks, months or years. To determine the charts to use, you must understand the trader that you are and then use the respective chart. Remember that it is possible to make money in any way. For long term traders, they need to use the long term chart such as weekly or monthly charts. They don’t care what happens during the intraday. All they care about is what will happen in a certain week or month. If they are bullish about a certain asset, they understand that the path to higher levels will not be smooth. In certain days, the charts will go high while in other days, the charts will go down. The advantage of having a long term view is that it allows one to have the bigger picture and also avoid huge transactional costs in terms of profits. For such a trader, they will focus mostly on the daily, weekly, and monthly charts.
In addition, since long-term traders look at the bigger picture, they are less worried about what the next economic data will be. They have factored this in their bull or bear case. The other category is on swing traders. These are people who have a medium term view of the market. They care about the asset classes that they own. For a swing trader, the monthly chart will be irrelevant. This is because they don’t care about the long-term view of the asset. They are only interested in knowing how a trade will move within a day or two. Therefore, these traders use the hourly and daily charts. By doing this kind of analysis, they will have a clear picture of what will happen.
Finally, there are intraday traders who open trades and close them within minutes. The benefit of being an intraday trader is that it reduces the costs (swaps) of overnight trading. It also allows one to make money when the price dips and when it moves up. For these traders, the hourly and minutes charts are relevant. It’s of no use to understand how the market will behave in the next week or month.