Forex Trading: Which Time Frame to Trade?

Filed under: Learn Forex Trading |

Many people new to forex trading tend to be attracted towards trading the lower time frames. Perhaps one of the main reasons for this is a lack of patience with the higher timeframes. New traders want to see if their trades were successful or not in a very short space of time. But this could be a mistake. Here are a few reasons why…

 

To begin with, every broker makes money on something that is called the ‘spread’. This is the difference between the buy price and the sell price on any given forex pair. It means that the instant that you put a trade on, you are already carrying a loss and the market has to move in your favour just for you to break even. But, “What does this have to do with different time frames?” you might ask. Well, on the short timeframes, you will probably have tighter stops and targets, and this means that the spread will become more significant. If the spread is 2 pips, and your target is 200 pips (equalling $100), then the spread will effectively cost you $1. However, on a shorter timeframe, your target may only be 20 pips (also equalling $100), but now the spread will effectively cost you $10. Over a long series of trades, these costs could add up and effectively make your system lose its edge.

 

Another reason why the longer-term timeframes are better is that the signals are more reliable and there is less market noise. On the shorter-term timeframes (such as 5,15, and 30 minutes timeframes), the support/resistance levels hold less weight and the charts are choppier. However, on the longer-term timeframes, the support/resistance levels are stronger and the price action signals are more reliable. These are some of the reasons why more experienced traders only choose to trade the longer-term timeframes.

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