When technical forex traders join the market, a large proportion of them stick to a single time period that fits their trading approach. They are unaware that this technique may lead them to lose sight of critical support and resistance levels, as well as long-term trends. Monitoring numerous time frames concurrently is a simple method to get a much clearer picture of what is occurring in the market.
Forex enables everyone to select the method and approach that is best for them. It makes little difference if the trader specializes in scalping, intraday trading, swing trading, or long-term position trading. The trader selects the time period that he will use to monitor price movement and choose when to join the market based on his trading style.
Intraday traders are used to trading on shorter time frames and will almost never utilize four-hour charts to determine their market entrance. On the other side, long-term position traders often follow long-term trends on daily or weekly charts, and shorter time frames are secondary.
A strategy that is appropriate for everyone
This does not preclude an intraday trader from using the four-hour chart in the same way that a position trader may use the 15-minute chart. Observing numerous time frames may be advantageous in any approach since it provides the trader with a unique viewpoint and vision of the markets. On the one hand, a long-term trader may fine-tune his entry more precisely on short-term charts, while tracking longer-term trends can assist intraday traders avoid making superfluous entries that might result in losses.
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Because forex is the world's most liquid market, even charts with the smallest time periods are relevant (as long as they do not look like spilt tea). Additionally, the forex market is open 24 hours a day, Monday through Friday, and traders can employ a variety of strategies and time frames during different trading sessions, depending on whether the markets tend to create trends (European and American sessions) or move more sideways within a given range (Asian session).
There is such a thing as too much of a good thing.
It is critical to remember that mixing too many time periods might cause the trader's decision-making to become muddled. Indeed, various temporal scales may give contradictory messages. Additionally, it is hard to identify precisely which time range is optimal for which trader.
Three time periods and the 4:1 or 6:1 rule are commonly suggested. This indicates that the intermediate period should be four (or six) times as long as the shortest and four (or six) times as long as the longest.
If the trader's primary time frame is H1, he may utilize a four- or six-hour chart to get a wider perspective on the markets. He will then utilize a 15-minute or 10-minute chart to make a more precise market entrance.
The medium-term timeframe provides an overview of both short- and long-term market movements and should be the primary timeframe for establishing SL and TP levels. The longest period establishes the market's trend and direction and offers further information on critical support and resistance levels. Opening positions against this big trend is still conceivable, but their potential is likely to be limited. The smallest time period is thus optimal for market entry timing. Because it has the greatest "noise," it is not the best indicator for evaluating the trade's overall direction.
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We can demonstrate this using the GBPUSD currency pair. On the four-hour chart, we can observe a rather distinct downward trend that has been in place since late October. The price broke above the September support level a week ago, reclaimed it, but after the rebound off the trend line, the price is once again heading lower.
While the 1 hour chart may seem to be the start of an uptrend, a glance at the chart with a longer time frame demonstrates fairly clearly to the trader that a long position may not be a smart choice. Additionally, the price has produced a lower high, indicating a possible trend reversal.
The 15-minute chart plainly demonstrates that the price has failed to establish a new high. If the price goes below the previous day's low (which is also the round figure 1.3400), this may be a good sell indication.
If the trader merely looked at the hourly chart, he may conclude that the market is in an uptrend and bet on the pound strengthening versus the dollar. When the larger time frame revealed a pretty significant decline and a breach of the support level, the trader may then fine-tune the entry on the shorter time frame.
Multiple time frames should be monitored by all traders who want a comprehensive picture of what is happening in the market and also want to optimize their entry points. Multi-time frame analysis is an excellent technique for identifying long-term patterns while allowing for more precise entry on shorter time frames.
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