Using Ranges For Trading Shorter Time Frames

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Using Ranges For Trading Shorter Time Frames

Forex pairs are often the perfect assets for trading shorter time frames. This is because they tend to trade in ranges as the competing central banks jockey back and forth for dominance over the global economy. These ranges tend to last for extended periods and can be quite narrow, especially when compared to other assets like stocks or indices. This is why they are perfect for trading the shorter time frames such as 5 minute and one hour binary options. Indices and stocks form ranges on monthly, weekly and daily charts; forex pairs for them on daily and hourly charts. If a long term range can be used to pinpoint long term signals then it makes sense that a short term range can be used for pinpointing shorter term signals.

The other day I was looking at some charts, flipping back and forth between assets and time frames. While flipping between the EUR/USD and the SPX something struck me which is what led to this posting. The short term ranges of the currency markets resembles the longer term and secular ranges presented by other asset classes. Take a look at these two charts. The first is a ten year chart of monthly candlesticks for the S&P 500, the second a one year chart of the EUR/USD currency pair.

The long term secular range shown on the SPX chart is comparable to the EUR/USD daily chart in that both are in obvious trading ranges. I’ll use that fact as our frame of reference. Someone trading the SPX may use this chart as the basis for a trade decision, targeting a reversal or perhaps a trend following signal. He (or she) may look at this chart and see what the long term trend is in relation to said support and resistance. The trader may then move down to a lower time frame to check on the shorter term trends. Really savvy traders may then move down even further to charts of one day candle sticks in order to pin point entries for shorter term binary trading, all the while capitalizing on the long term range. Possible trading strategies include trend following techniques that follow the path of the SPX as it moves from one extreme to the other. Other possibilities include capturing reversals at the extremes. The point here is the SPX is trading in a range and that range can be exploited for profitable entries in lower time frames. In the case of the SPX it means signals on daily and hourly charts with weekly and monthly expiry. However, if the identified range were in a shorter time frame then the signals would likewise come in shorter time frames.

Now let’s move over to the chart of the EUR/USD and a shorter time frame. If we can assume that a strategy will work for the SPX while it is in it’s range then we can also assume a similar strategy will work on the EUR/USD while it is within a range. The important thing to note for this comparison is that the asset be trading in a range in relation to the chart at hand. On the SPX we moved down 3 (three) time frames in order to place a trade, from monthly to weekly to daily to hourly. If we were to do the same thing with the EUR/USD that would mean taking a trade on a chart of 1 or 2 minute candles; a move down from daily to hourly to 15M to 2M.

Once the longer term range is identified it is time to narrow the focus and look for a signal. Moving down three time frames to a 2 minute chart is more extreme than I like to trade so I will only go down 2X. Market movement, even on a heavily traded pair like the EUR/USD, is highly unpredictable on one and two minute charts. In the chart above we can see that the pair is near the top of the range and moving lower. The false break out and current black candle just below the moving average are very bearish. In the chart below of 15 minute candles we can see the asset moving down strongly from the 30 EMA confirming the bearish stance taken on the previous chart. The important thing to note here is that we are now watching for a signal on a chart of 15 minute bars, versus one day bars above.

So long as the asset is within the trading range we can expect it to behave like a range bound asset. For binary traders this means taking signals on bounces from support, falls from resistance or following the trend when that is appropriate. In this example the longer term trend is range bound and down so we will be looking for a bearish trade in the shorter time frame. The 15 minute chart shows an extended market so at this time it would be advisable to wait for a bounce higher and another trend following signal. Based on the longer term chart we can assume that the EUR/USD will move lower until it reaches a strong support or the bottom of the range, whichever comes first. Until that support is reached trend following signals can taken keeping in mind to tailor expiry to the time frame being traded.

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Many traders do not place very much attention on the actual time frame that they intend to trade or how long they intend to hold a position for. They may set a stop loss and take profit order levels, but otherwise have no particular time frame in mind for closing out their position.

This article will delve into the topic of what the best time frames for trading in the forex market are. It will also explore how the answer to that question may vary depending on the primary type of trading strategy you prefer to employ to manage your trading activities with.

The Three Basic Trading Time Frames

Most traders and analysts will agree that trading time frames can be broken into three broad categories. These time frames are typically known as the short, medium and long term time periods.

The first thing that seems important to note about this terminology is that each of these time frame categories does not have a precise definition among forex traders, other financial market participants and authors.

Perhaps the best way to explain this variation is that the time periods these commonly used terms refer to tend to depend on the usual time a position is held given the type of trading strategy that a trader employs.

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Hence, if a trader uses a trading strategy that tends to have a relatively short holding period, like a day trading strategy, for example, where all positions are closed out prior to the end of the trading day, then the length of time associated with each time frame term will be proportionally shorter than the length of time for a swing or trend trader, for instance, who might hold positions for a considerably longer period.

Forex Time Frames by Trading Strategy

Although trading time frame terminology is not especially precise, it can nevertheless help to get a general understanding of what phrases like long term, medium term and short term actually mean to traders who use different trading strategies.

For example, the time period that each of these categories tends to cover that is most relevant for day traders, who generally seek to close out trading positions the same day they were initiated and so do not usually hold positions overnight, can be described as follows:

  • The Long Term – This time frame for a day trader covers a period lasting from several hours to an entire day session.
  • The Medium Term – This time frame for a day trader covers a period lasting from ten minutes to around an hour.
  • The Short Term – This time frame for a day trader covers a period lasting from seconds to several minutes in duration.

In contrast, swing traders are those who look to take advantage of bigger fluctuations in market exchange rates. They are usually more than fine with holding positions overnight.

The time period each of these time frame categories tends to cover that is most relevant for swing traders can be described as follows:

  • The Long Term – This time frame for swing traders covers a period lasting from several months to a year or more in duration.
  • The Medium Term – This time frame for swing traders covers a period lasting from several weeks to a month or so.
  • The Short Term – This time frame for swing traders covers a rather brief period lasting from a few days to a week or so.

Finally, those engaged in long term foreign exchange trend trading or foreign currency investment activities tend to have a much lengthier time frame that they are willing to hold positions for.

  • The Long Term – This time frame for trend traders or investors covers a period lasting a few months to more than a few years in duration.
  • The Medium Term – This time frame for trend traders or investors covers a period lasting from several weeks to as long as a few months.
  • The Short Term – This time frame for trend traders or investors covers a period lasting a few weeks.

A List of Common Forex Trading Time Frame and Analysis Options

When a technical forex trader is analyzing exchange rate data for a particular currency pair, they will often view this information in the form of close, bar or candlestick charts that are plotted at several different time frames or intervals.

These intervals of time are also sometimes called time frames or periods, and analysts tend to select a range of multiple time frames in order to be able to assess the currency pair’s short, medium and long term trends and other price action behavior with associated time frames appropriate for their own trading strategy.

Below is an example of a typical series of three exchange rate charts for the USD/CHF currency pair covering short, medium and long term time frames that might be suitable for a swing trader are shown below in Figure 1.

Figure 1: Three candlestick exchange rate charts for USD/CHF plotted using time intervals of one hour, four hours and one day. The RSI is shown in the indicator box below in pale blue, while the 200 day moving average is superimposed over the exchange rate in red.

Some of the most common incremental time frames used by technical analysts when reviewing exchange rate movements for forex currency pairs include the following:

  • The one minute time frame
  • The five minute time frame
  • The fifteen minute time frame
  • The thirty minute
  • The one hour time frame
  • The four hour or 240 minute timeframe:
  • The one day or daily time frame
  • The one week time frame
  • The one month time frame
  • The one year time frame

In addition, some very short term traders like scalpers might look at tick charts, which do not have a particular fixed time interval between data points. They instead show a new data point every time a certain number of trades take place or some other measurable criteria is fulfilled.

Traditional Trading Timeframes for Forex Strategies

A number of different strategies with varying timeframes are typically employed by forex traders. These strategies can be profitable depending in large part on the plan the trader has devised to govern their activities, as well as on the trader’s level of discipline in adhering to the specific rules in their trading plan.

The timeframes for holding positions in the strategies to be mentioned below vary from less than a minute for scalp trading, to weeks or even months for long-term trend trading. Swing and range trading time frames can vary depending on market movements, although positions are often liquidated within several trading sessions.

As the name implies, those using a day trading strategy customarily liquidate their positions by the end of the trading day. The ending time of which is specified in advance due to the forex market being open 24 hours a day throughout the trading week that starts on Sunday afternoon with the Auckland, New Zealand open and runs until the New York close on Friday afternoon.

In addition to scalping, swing trading, range trading and trend trading, another type of strategy consists of news trading. News traders typically use fundamental analysis for the objective of profiting from market volatility seen after major news announcements. For example, the volatility that news traders thrive on might depend on the results seen for the release of a nation’s economic data, as well as the outcome of macroeconomic or geopolitical events that directly affect the valuation of that nation’s currency.

Trading Strategy Time Frames

What follows is a list of the more popular trading styles and their respective trading timeframes:

  • Scalping – The market adage, “long term is noon” aptly describes the scalping trader’s approach to time spent in the market. Scalping is a strategy that is often popular with market makers, since they can quickly offset the risk of positions they receive from customers at advantageous rates due to the bid/offer spread they quote. They can also take small profits by simply quoting prices to other market makers and via professional forex brokers. Other scalping traders consist of proprietary desks and retail traders with access to very tight market spreads and who pay very low per trade commissions, if any.

The timeframe for scalp traders is generally very short, since traders liquidate positions as soon as they make a small profit. Conversely, if the market is moving against them, successful scalpers tend to take their losses just as fast.

  • Day Trading – This short-term trading strategy requires that the trader only take positions during their pre-determined trading day, which would typically be specified by the trader ahead of time in their trading plan. By the end of their trading day, the day trader would generally need to flatten out all of their positions regardless of their profit or loss.

The timeframes relevant for day traders generally range from several minutes to several hours, depending on market dynamics and the trader’s objectives. Day trading is popular among many traders in the forex market, as it allows the trader to have no open positions to worry about overnight.

  • Range Trading – As its name implies, this type of strategy is based on trading ranges. Such patterns are identified using technical analysis methods and based on the establishment of clear levels of support and resistance on an exchange rate chart. Once the levels of supply and demand are identified by the trader, they then initiate and liquidate positions according to these levels, buying at levels of support and selling at levels of resistance.

The timeframe for range traders varies widely and can be from a few hours to extending into the following trading session and beyond. Once a position is established at the lower or higher end of a range, the trader then needs to either wait for the position to go to the target level, or conversely take a loss if the position has gone in the opposite direction.

  • Swing Trading – this strategy typically involves using technical analysis for the intermediate term to determine entry and exit points on a chart and subsequently establishing positions based on this analysis.

Much like the range trader, the swing trader’s timeframe typically varies from a few days to a week or so. Many swing traders try to exploit multi day price patterns in the market.

  • Trend Trading – the longest-term of the trading strategies, trend traders identify the overall trend in the market, establish a position and wait for the trend to play out. The trend trader can be a technical analyst buy may also look at underlying currency market fundamentals to establish their criteria for establishing a forex position.

Typically, currency trend traders look for long term trends and relative movements in benchmark interest rates. It can take several weeks to months or even years for the trend they have identified to fully unfold before liquidating their positions when they think the time is right. Although taking this long term trend following perspective can involve increased risk of prolonged drawdown periods, successful trend traders are some of the highest earners among forex traders when the conditions are right.

Choosing the Best Trading Timeframes

Selecting the best time frame to trade forex will really depend on the trader’s level of experience, the type of trading strategy they employ, and how they approach the forex market.

While most novice traders tend to shun the approach, at least initially, taking a swing trading or long term outlook is generally recommended for newer traders, especially since their reaction times tend to be longer due to their relative inexperience in the market.

Although beneficial, another reason for the reluctance among novice traders to consider longer term strategies is that most novice traders tend to be impatient and may equate “long term” with having to wait for profitability. Nevertheless, the truth of the matter is that short-term trading is considerably more difficult and usually takes the trader quite a long time to master since they need to evolve their reactions and emotional states to the point where they can be successful.

New traders therefore should consider beginning to trade with a longer term outlook, since this will also generally reduce their trading frequency and teach them the importance of operating strategically. Once their trading methods have proven successful, they can then move on to dealing in the shorter time frames is they wish.

Furthermore, many profitable traders who use technical analysis will review charts that represent several different time frames when approaching a relatively new currency pair to get a sense for the short, medium and long term picture for that pair. And so regardless of the preferred trading time frame, using a multi time frame analysis approach is always recommended.

Novice traders must also be made aware that the shorter the time frame they trade in, the more market volatility they can experience. The incidence of trading mistakes also tends to increase with trading frequency and the need for quick reaction times.

Trading higher time frames also tends to reduce the impact that short term exchange rate variability or noise has when it comes to taking advantage of the overall market trends, which can in turn increase the potential for steady profits if positions are managed appropriately by the trader.

When using a long term strategy, the trader can use a weekly chart to establish the long term trend and use the daily or 4 hour chart to better time the initiation of positions.

Until this longer timeframe analysis is mastered, a novice trader should generally avoid trading the shorter time frames. As the trader gets used to dealing with increased market variability associated with the shortening time frames, they can become more experienced in trading the forex market.

For day trading, scalping and other forms of extremely short term trading, many traders use the fifteen minute, five minute, and even one minute or tick charts. Market volatility and trading frequency tends to increase significantly as the trader operates in these shorter time frames, often requiring more focus and concentration. Taking frequent small profits and exiting the market the moment one recognizes they are on the wrong side are part of the basic mindset needed to succeed at very short term trading, which can be quite challenging to say the least.

Time Frames of Forex Trading: A Beginner’s Guide

Utilizing different forex time frames can assist traders to spot the larger trends and more granular price action that may be unfolding. Different viewpoints can be formed when switching between different time frames on the same currency pair and this can either benefit or hinder the analysis. Therefore, it is crucial to have a solid understanding of forex trading time frames from the very first trade.

This is a beginner’s guide that introduces the concept of forex time frames, their challenges, why they are useful, and how they can be implemented.

What are the main forex time frames?

Forex trading time frames are commonly classified as long-term, medium-term and short-term. Traders have the option of incorporating all three, or simply using one longer and one shorter time frame when analyzing potential trades. While the longer time frames are beneficial for identifying a trade set up, the shorter time frames are useful for timing entries.

Forex time frames

Classification Trading Style Trend Time Frame Trigger Time Frame
Long term Position trading Weekly Daily
Medium term Swing trader Daily 4-hour
Short term Day trading 4-hour Hourly
Scalper Hourly 15-minute

How does time frame analysis impact forex trades?

Switching between different forex trading time frames has a number of advantages. These become apparent when viewing forex vs stocks . Due to the sheer liquidity of the forex market, traders can view very short time frames and observe meaningful information whereas, a similar time frame for an illiquid stock may not present any new data points if the price has not changed.

Another advantage in favor of forex time frames includes the 24-hour nature of the forex market during the week. Switching between multiple forex time frames during different trading sessions ( Asian , European , US ) presents traders with different market conditions that are characteristic to that trading session like ranging markets during the Asia session or trending markets during the European and US session cross over. Traders can capitalize on these different market characteristics by using various time frames to spot ideal entries.

What forex time frame should be traded?

Many traders new to forex will often wonder if there is a time frame that is better to trade than another. Fundamentally, choosing the best time frame to trade forex will depend greatly on a trader’s preferred trading style and strategies used.

To choose the best time frame, consider what your trading style is and what trading strategy you wish to follow. These should influence the appropriate time frame to be trading on. Thereafter, select a technical analysis chart that you are comfortable with, conduct thorough analysis, and ensure to implement sound risk management on all trades.

Read our guide to forex trader types to find out which one you are.

Using forex time frames that match trading strategies

Often, traders can get conflicting views of a currency pair by examining different time frames. For example, while the daily chart might be showing an up-trend, the hourly chart can be showing a down-trend. But which way should it be traded?

This confusion can produce counter-productive unrest in the trader’s mind when attempting to line up trades. Therefore, it’s important for traders to plan the time frames they wish to trade in accordance with their trading strategy.

Swing trading example

A swing trader adhering to a trend following strategy should avoid making rash decisions when viewing price movements on smaller time frame charts. Traders may observe what looks like a trend reversal on a shorter time frame chart. However, after viewing the daily chart, it is clear to see the trend is still well intact.

Four-hour EUR/USD chart providing misleading signals suggesting a trend reversal

Incorporating a longer time frame allows traders to see a ‘bigger picture’ of the currency pair, to get an idea of general trends, or the sentiment that may exist; while the shorter time frame chart can be used for timing entries into the market.

Therefore, looking at the daily chart, it is clear to see that the downtrend is clearly still in force when observing the correct time frame.

Daily EUR/USD chart: Showing a clear trend continuation lower

Traders should adopt multiple time frame analysis to incorporate as much information as possible into the analysis – without overcomplicating the analysis.

The beauty of this approach is that technical analysis can be applied on both time frames to achieve greater conviction for the trade.

Technical analysis techniques for identifying the trend

  • Understand and identify forex trendlines
  • 200 day moving average (for traders using the daily time frame)
  • Moving Average Convergence Divergence ( MACD )

Technical analysis techniques for identifying entry levels

Trading with multiple time frames

As mentioned above, the type of trading strategy adopted will greatly influence the forex trading time frames selected. Alternatively, rather than selecting a single time frame to trade, many traders will adopt a technique called Multiple Time Frame Analysis . This involves viewing the same currency pair under different time frames.

With this approach, the larger time frame is typically used to establish a longer-term trend, while a shorter time frame is used to spot ideal entries into the market.

Further reading on forex trading

If you’re new to forex, download our free forex trading guide to learn the fundamental skills. We also recommend signing up to one of our trading webinars to grow your expertise with help from our analysts.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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