We explain the pros and cons of day trading 5-minute charts all the way to investing in longer-timeframe charts for beginner traders.
- Chart timeframes from 1-minute to 1-month candlesticks
- 3 reasons rookies tend to mistakenly choose lower timeframes
- How to choose timeframe based on profit targets
- Advantages and disadvantages of different timeframes to trade
Define: chart timeframes
As you are likely already aware – you can zoom in on a price chart to see only the most recent price action in detail or zoom out to see several years’ worth of price data. Look here in the FlowOne trading platform:
If you select a 1 Minute timeframe for trading, then each individual japanese candlestick on the chart lasts one minute. So, if there are 50 candles on the screen, you are looking at 50-minutes worth of price data. A 1 Day timeframe means the candlestick closes one day after opening etc. To clarify, the timeframe refers to the length of time each candlestick (or bar on a bar chart) lasts, not now much time is covered in the horizonal axis of the chart.
There are no less than 14 chart timeframes to choose from in the FlowOne trading platform. But we can simplify the decision over which one to choose for our trading setups by dividing the list into three.
1 .Lower timeframe = 1- 30 Minutes2. Intermediate timeframes = 1 hour to 6 Hours3. Higher timeframes = 1 Day to 1 Month
Now the first decision has become whether to become a lower, intermediate or higher timeframe trader.
Rookie mistake – starting with lower timeframes
The biggest factor behind the decision to do short-term trading is the desire for easy money. Clicking a button on your computer and making a profit 5 minutes later is a very appealing idea. But the big money is not made with the ‘quick bucks’ in trading, it is made from winning more trades than you lose over long periods of time. This quote from the movie Wall Street sums it up well:
“Remember there are no short cuts son, quick buck artists come and go with every bull market but the steady players make it through the bear markets.”
New traders will typically have a smaller account balance than more experience traders. This makes sense because they have not yet gained the confidence to invest more money into forex or other financial markets. But as a result of their small balances, there is often a mistaken belief that they can only afford to risk a small number of points on a trade.
For example, if you had just 100 CHF in your trading account but each point moved your profit/loss by $10 – then you necessarily have to cut losses and take profits very quickly – forcing you into lower timeframe trading strategies like scalping or day trading. The alternative solution to managing your money with a small account balance is to reduce the size of your trades. In this same example, the trader could opt to risk 1 CHF per point – or even 0.1 CHF per point. In this instance the trader could comfortably withstand moves of 100 pips or more in the price, offering the trades a lot more room to breathe.
The last reason new traders choose short-term charts is because they think that longer term charts need them to be able to ‘predict the market’ where as in the short term they can just ‘jump in and out.’ This is misses the point. It is much harder to predict where a currency will be in the next 5 minutes than where it will be in the next few days because of the influence of large trades or unexpected news in short timeframes. Such things just look like a blip on longer timeframes.
So higher timeframes are better for forex noobs?
Not necessarily. While we’ve just warned about some of the faulty reasons that new traders start with short timeframes but that’s not to say short timeframe charts are all bad. A clear benefit of short-term charts is that they give you a lot more ‘screen time’, which is the only true way to learn forex trading online.
You are better off choosing a short-term timeframe chart if you are planning on holding your trades for less than a day. It would be no-good day trading small prices moves in the market when using a daily timeframe, which means there is only one candle formed every day – it would give you no information from which to trade.
The shorter the length of time you are planning to hold onto the trade, the lower the timeframe. The length of time you will hold onto the trade comes from experience of seeing how fast a market moves a certain number of points.
For example, if you aiming to earn 30 pips on a EUR/CHF currency trade, you can see in the chart below that a 15-Minute candle chart quite accurately shows you the information you need.
However, if you are aiming to make 100 pips on a trade, there will be lots more ups and downs to ride out and it will take longer. The chart below show that a 4 hour candlestick chart of EUR/CHF shows the right amount of price action to understand the progress of the trade.
Whether you opt to aim to take profit at 5 pips, 30 pips, 100 pips or 500 pips rests entirely with what type of trader you wish to be. Learn more about this in our blog What are the different trading styles?
Advantages and disadvantages of different chart timeframes
The advantages of short-term charts are that new traders can gain experience quickly because many more opportunities are available – and they offer the chance at quick profits.
The main disadvantage is that lower timeframes by their nature very fast moving, and normally only experienced traders with a well-tested trading strategy have the presence of mind to take the right decisions. New traders can get emotional seeing profits and losses come and go quickly.
The advantage of the higher timeframe charts is that the price moves take much longer to develop, giving the new trader much more time to think through the merits of the trade and any possible drawbacks. It also tends to be mean a lot less screen time is needed so if/when you become a consistent trader then you can enjoy the real benefits of a trading lifestyle.
The main disadvantage is that the trades take much longer to materialise and there are less opportunities. This means higher timeframes give new traders little chance to practise their craft.
Without getting too goldilocks on you, quite often it is the timeframe that is neither too short term nor long term that works best for newb traders. It offers the best of both worlds, a little more time to think but also plenty of chance to practise.
The good thing about trading is that there is no one-size fits all approach, so any new trader is within their rights to choose any timeframe but hopefully this blog has given you the information to choose for the right reasons.