The time frame refers to the period in which a forex trader operates. The time frames in forex can encompass seconds, minutes, hours, days, or months. Currency traders may use multiple time frames to analyze and track a trade. Or they may just stick to one time frame. The time frame is also written as a timeframe. In charting time frames down to 1 minute, 1 hour, 2 hours, 4 hours, weekly, and monthly charts, there are a lot of options from which a trader chooses.
Selecting which option is right for you is essential if you want to create a good trading plan. Below is the breakdown of the different time frames. Each of the time frames is followed by the explanation of what it offers to the trader.
- Long Term / Position Trader
Traders here normally rely on Daily and Weekly charts. The Daily chart will help in placing specific entry orders. Trades using these charts want to plan from weeks to months, while the Weekly charts will ascertain the longer-term outlook and overall trend.
Pros
- You don’t need to keep an eye on the market constantly.
- There is less transactional cost because there are fewer trades.
Cons
- A trader requires large stops, or very large risk capital to withstand large potential drawdowns.
- A reader needs immense patience as good trades come around only a few times per year. Some of your trades may be a loss.
- Short Term / Swing Trader
Traders here use hourly time frames and trade from several hours a day to a few weeks. They are more into trading that takes less time. These traders are fast ones who want to close deals and investment within days or weeks.
Pros
- Traders have more opportunities to trade when compared to longer time frames.
- This plan suites most traders as it is a good compromise between very long term trading where you may be “disconnected” from market movements and very short term trading where you may be “obsessed” with market movement.
Cons
- Transactional costs are higher when compared to long term trading because trading is more frequent.
- Overnight risk also becomes a factor in this time frame.
- Intraday / Day Trader
Traders trade in short time frames as they refer to minute and hourly charts. They also normally trade the whole business day and exit the market just before the market closes. These traders are temporary and fast-paced traders. They want to trade as fast as they can within one day.
Pros
- There are lots of trading opportunities.
- There is no overnight holding risk.
Cons
- Transactional costs are higher than in other time frames.
- Trading is mentally stressful, since traders need to decide fast whether to trade. Otherwise, they lose the opportunity.