Although trading time frame terminology is not especially precise, it can nevertheless help to get a general understanding of what phrases like long term, medium term and short term actually mean to traders who use different trading strategies. Often times, traders can get conflicting views of a currency pair by examining different time frames. While the daily might be showing an up-trend, the hourly can be showing a down-trend. It can be really confusing for beginning traders, which time frame to build strategy on?
Many new traders spend days, weeks, or even months, trying every possible time frame in an attempt to find the one that makes their trading profitable. Graphical trading charts can be based upon many different time frames, including time, trades, volume, and price ranges. With an essentially infinite number of choices, choosing the best time frame for a particular trading system or trading style can seem like a daunting task, but if you are trading correctly it is actually a very simple task.
A general rule is that the longer the time frame, the more reliable the signals being given. As you drill down in time frames, the charts become more polluted with false moves and noise. Ideally, traders should use a longer time frame to define the primary trend of whatever they are trading. Once the underlying trend is defined, traders can use their preferred time frame to define the intermediate trend and a faster time frame to define the short-term trend.
Trading is one of the few professions where less involvement is usually better. This is where trading off higher time frames comes in; their ability to allow you to set and forget your trades will invariably make you a better trader because you will not need to look at the markets as often to monitor your trades. When traders look at the markets and analyze the charts many times throughout the day, they are naturally increasing the chances of executing a low-probability trade. The biggest temptation comes from analyzing lower time frame charts.
Typically, currency trend traders look for long term trends and relative movements in benchmark interest rates. It can take several weeks to months or even years for the trend they have identified to fully unfold before liquidating their positions when they think the time is right. Although taking this long term trend following perspective can involve increased risk of prolonged drawdown periods, successful trend traders are some of the highest earners among forex traders when the conditions are right.