To answer this, selecting a trading time frame depends on several factors:
Trading Style: Different styles (day trading, swing trading, position trading) require different time frames. Day traders often use shorter time frames like 1-minute to 15-minute charts, while swing traders might use daily or 4-hour charts, and position traders could rely on weekly or monthly charts.
Market Conditions: In volatile markets, shorter time frames might provide more trading opportunities, whereas in less volatile markets, longer time frames might be more effective
Personal Availability: Choose a time frame that fits your schedule. If you can monitor the market frequently, shorter time frames might work; otherwise, longer time frames could be more suitable.
Risk Tolerance: Shorter time frames can result in more trades and potentially higher risk, while longer time frames might provide more stability but with fewer trades.
Strategy: Your trading strategy should align with your chosen time frame. Some strategies are designed specifically for certain time frames.
Experience Level: Beginners might start with longer time frames to gain experience and confidence, while more experienced traders might explore shorter time frames.
Ultimately, the best time frame for you is one that aligns with your trading goals, style, and personal preferences.
Market Liquidity:
In any time frame, a time frame where market liquidity is better observed is more suitable for trading. Liquidity can be assessed based on the quality of market text and identifying signs of trend strength and weakness. For example, when candles exhibit less volatility and are more uniform with shorter wicks, it indicates good liquidity and more trading orders in the market. Since we trade in an efficient market, higher liquidity in that market will result in higher trading volume and more active traders in that market and time frame. Therefore, the market is more analyzable, and we can more easily assess and analyze the market based on the clues we’ve learned, set appropriate movement expectations, and manage our trading positions with a higher probability of success. Conversely, larger candles (compared to the average candles in the market), longer candle wicks, more candle overlaps, and more erratic price movements indicate fewer trading orders and lower liquidity in the market.
In addition, in a market like Forex, the spread can also give an indication of liquidity in a currency pair. Specifically, in charts with higher spreads, less money is flowing in that currency pair, there are fewer transactions, and order density is low with wider gaps between orders. To cover market fluctuations and protect themselves from losses, brokers are forced to increase the spread so that the fewer transactions make it cost-effective for them. However, in reality, the core trading does not depend on the time frame in which traders place their orders. It is observed that a larger community of traders tends to focus more on certain time frames and pay more attention to them. Therefore, this time frame is the one where, based on observed clues, the most trading orders are placed and executed. By recognizing these clues, we understand which time frame has more transactions and higher liquidity.
Choosing a Time Frame Based on Capital:
Small Capital: Traders with smaller capital may prefer shorter time frames. Short-term trading (like scalping or day trading) allows them to make multiple trades and potentially grow their capital faster, though it involves higher transaction costs and requires close monitoring of the market.
Medium Capital: Traders with medium capital might opt for swing trading or medium-term time frames (like daily or 4-hour charts). This approach balances the need for frequent trades with the ability to manage trades over several days or weeks, potentially reducing the impact of transaction costs.
Large Capital: Traders with larger capital can afford to use longer time frames, such as weekly or monthly charts. Longer-term trading (position trading) allows them to take advantage of broader market trends and reduces the frequency of trades, which can be more cost-effective and less stressful.
Risk Management: The choice of time frame should also align with risk management strategies. Shorter time frames may lead to higher volatility and risk, whereas longer time frames can provide more stability but might involve a longer wait for the desired results.
Liquidity Considerations: Larger capital traders might prefer more liquid time frames to ensure they can enter and exit positions without significantly affecting the market price.
Ultimately, the choice of time frame should align with your capital size, trading goals, and risk tolerance to effectively manage your trades and optimize your strategy.
Naturally, the higher the time frames we choose, the larger the pip or percentage losses we will have, which requires more capital to endure those losses. Therefore, the more capital we have, the more flexibility we have in selecting higher time frames. For instance, our capital might be sufficient to handle a 120 pip stop loss on a daily time frame, but we may not have the psychological tolerance to bear such a cost. If we identify a clean chart on a higher time frame but cannot trade on that time frame due to the reasons mentioned, and are forced to move to a lower time frame, to increase our chances of success, our trading positions should align with the direction of the higher time frame (this does not apply to more distant time frames)..
If you are a trader who can manage multiple open trades simultaneously, where the results of each trade do not affect the emotional and psychological state of the other trades, you can trade on lower time frames. Additionally, based on personality types, some people prefer to determine the outcome of their trades within an hour, a few hours, or by the end of the day, while others may be able to tolerate holding positions for several weeks or months. Therefore, each individual should choose their time frame based on their personality type. Even if someone has sufficient capital to trade on higher time frames, their personality type might lead them toward lower time frames, preferring to trade smaller fluctuations with larger accounts to achieve their desired profit.
Institutional traders, due to their roles in market making and market management, help in better price discovery. For their short-term goals, they focus on daily time frames; for medium-term goals, they use weekly time frames; and for long-term goals, they rely on monthly time frames. If, based on previous considerations, we have no issues with the daily time frame, it is suitable due to its greater stability and better analysis capabilities, providing a more peaceful trading experience. For those involved in stock markets and who have the patience for long-term investing, contrary to a common misconception that holding a stock means buying it and holding it for several years, it is better to use higher time frames, such as monthly, to achieve the best return on a long-term investment.
So, if we are also planning for long-term investing, it is better to base our investment decisions on long-term charts and set price targets. This way, we will know how long and for what reasons we should wait to achieve the best performance from our investment and avoid losing the profits we have gained.
In choosing a time frame based on personality type, it’s important to assess the trader’s tolerance and capacity for managing simultaneous open trades. This means determining how many trades a trader can handle at once, and the higher their tolerance, the more they can trade on lower time frames. Conversely, if a trader has a higher threshold and patience for waiting for trades to reach their outcomes, they might choose higher time frames for trading. For example, if a trader can tolerate having a trade open for 2 months, they are more suited for higher time frames. Similarly, if a trader can handle a greater number of open trades in a single day, they can trade on lower time frames.
There is a principle among lawyers that someone who knows less about a case but has useful and complete knowledge is more successful than someone who knows everything (even trivial details) but gets overwhelmed and confused by the sheer volume of information (similar to the Tversky effect).
