By: Johnathon Fox
When nearly all traders come to trading they begin on the very small time frame charts such as the 5 min or 15 min. The main reason for this is because the markets are moving like crazy and this to the new trader signals many trading opportunities.
The biggest thing these same traders are failing to notice is that whilst there are plenty of opportunities on these very small time frame charts, there are also many more false signals that will wipe them out.
The smaller time frames are notorious for eating up traders accounts because of the pace they move and just how erratic the moves can be. This can make it especially hard for the newer trader trying to learn how to trade effectively and make money.
The first thing these traders need to do is recognise that whilst the smaller time frame means more possible trades to enter, it does not equal more winning trades. Because of the factors spoken about above more chances to make trades actually normally ends with more chances to lose money!
Why is the Longer Time Frames Better?
There are many benefits to sticking to the longer time frame charts such as the daily or 4hr charts. A few of these are:
The Price Action is more reliable
The market does not move as fast
The market does not move as erratic
It is easier to define trends
Traders have time to make the correct decisions
The best way to explain why a signal that is produced on the daily chart is more reliable than a signal produced on the 15 min chart is to look at the time that goes into making the signal.
For example, if we get an inside bar on the 15 min chart it tells is that for that 15 minute period traders could not move price out of the previous bars high or low. If however we get an inside bar on the daily chart it means that traders have traded through all sessions including the US and UK sessions over a 24 hour period, and have been unable to move price either higher or lower than the previous session.
Obviously we can learn a lot more from a price action signal that has had 24 hours worth of data put into it than only 15 mins worth of data.
The other example is a trader playing a signal on the 15 min chart. If a news event comes out whilst this trader is in a trade, they would most likely be stopped out within seconds. This move may only be 20 pips but that would be enough to cost the trader their trade. If another trader was in a daily trade at the same time, this 20 pip move would hardly even show up on their chart, and they would not be nearly as affected as the trader on the 15 min chart.
Stick to the Daily Charts
The best thing for traders to do who are trying to learn how to become profitable is to only trade signals of the daily chart. This will allow them to have the time required to make good decisions and to also only trade good signals that they know are not false.
Many traders will find this hard but they will also continue to struggle to make money until they make the change. Of course traders do not have to always stick to the daily charts, but if you are losing money I highly suggest giving the higher time frames a go. Once you have become profitable using the higher time frames you can then consider moving down the charts.
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