Before we dig deep into why is it better to trade with higher time frames, let us share something with you. Recently, we ran a poll in our telegram channel to know what kind of trades our valued members prefer. There were two purposes behind this poll;
- Syncing our trading signals with our valued community members’ demands
- Educating our members and equipping them with the right knowledge and trading tools
Here’s the poll we published;
As you can see the poll results, 8% of participants voted for scalp trades, 69% for the day trades, whereas 23% of participants of the poll voted for swing trades.
As a forex trader, you need to know what kind of trades work the best. Now having said that, how do we find out what kind of trades will play really well? Confused? Well, don’t be. We’ve got your back. Just read through the rest of this article and you’ll be free of this headache.
In forex trading, there are no specific ways of doing anything. But of course, there are some laws or a certain group of rules you need to take care of when looking for the answers to any question regarding forex trading.
Now, let’s come to the question we’re looking for an answer to. This question is extremely important as it “sets the stage” so to speak for the outcome of your trading. As professionals, the two time frames we trade, as well as what we recommend, are the 4 hour and daily time frames. Although we glance at the weekly chart and the 1-hour chart, we do all of our trading on the 4 hours and daily charts. You might be wondering why is it better to trade with higher time frames?
What’s So Special About the Higher Time Frames?
Here are the four most useful advantages to trading the higher time frames
- Act as a natural news filter
- Easier to develop a directional bias
- Provide quality over quantity
- Reduce trade frequency
Let’s brief each one down into greater detail.
Acts as a Natural News Filter
It goes without saying that the range (high and low) of each period on the daily chart is greater than each period on a 5-minute chart. What may not be so obvious is that this acts as a natural news filter. How does it do this? The easiest way to explain it is to observe two different moving averages. One shorter period and one longer period.
Let’s pretend that the 10 period MA above represents a 5 minute chart and the 100 period MA represents a daily chart. Notice how much smoother the 100 period MA is? Now pretend that your stop loss is on either side of both moving averages. Which one is more likely to hit your stop loss? I think we can all agree that the 10 period MA is more likely to stop your loss because it’s much more volatile.
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The higher time frame allows price action to “normalize” throughout the day. This creates a much smoother market to trade compared to that of the lower time frames. Because the 5 minute chart is made up of 5 minute periods, there isn’t as much time for price to normalize. So when a news event causes a large spike in price, your stop loss is much more vulnerable on a lower time frame than it is on a higher one.
Just remember, the higher the time frame, the smoother the market. And a smooth market with swings highs and lows is where we make our money.
Easier to Develop a Directional Bias
Due to the fact that the daily chart allows you to see a greater period of time, it becomes much easier to develop a directional bias compared to the lower time frames. There’s a reason why traders who trade the lower time frames use the higher time frames to identify support and resistance levels. Why do they do this?
Because it’s much easier to identify key levels of support and resistance on the higher time frames. Not only that, but levels on the higher time frames carry more weight than those on the lower time frames. This is because more time goes into creating these levels. An example would be a key level that goes back 3 years on the daily chart vs a level that goes back 48 hours on the 5 minute chart.
Key levels of support and resistance on the higher time frames are generally more reliable than those found on the lower time frames.
Produces Quality Over Quantity
The higher time frames generally provide better quality setups than the lower time frames. This is due to the fact that there are fewer setups on the higher time frames. A pin bar for example may only occur once or twice a month on a given currency pair. Whereas you can probably find a handful of pin bars in one day on a five minute chart.
Having fewer trade setups means more weight is placed on each one. This is because it stands out and becomes obvious to more traders around the world. More often than not, a higher number of trade setups equals a higher percentage of false setups.
In other words just because the lower time frames produce more potential setups, doesn’t mean those setups should be traded.
Reduces Trade Frequency
Because there are fewer setups, you’ll be forced to trade less often. This may sound like a bad thing (I used to think so too), but it’s not. The less you trade, the more you open yourself up to opportunities. In order to see valid trade setups, your mind has to be in a neutral place. If you’re constantly taking trades and biting your nails with anxiety, you’re preventing the open mindset necessary to identify these setups when they occur. This open and neutral mindset can only come with trading less frequently.
You won’t be able to spot A+ trade setups with your head buried in the sand.
The saying, “less is more” has never been truer than it is in the Forex market. You don’t need 20 or 30 trades per month to make good money in Forex. All you need is two or three good trades per month to make a considerable amount of money, even on the daily chart. This is especially true if you’re using a proper risk to reward ratio.
We hope this publication made it clear to you why is it better to trade with higher time frames. Wish you best of luck. Happy Trading!
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