Most technical traders in the foreign exchange market, whether they are novices or seasoned pros, have come across the concept of multiple time frame analysis in their market educations. 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.
One of the main concepts behind the beginner strategy is multiple time frame analysis – using a higher time frame to determine the overall market direction and executing trades on a lower time frame. By determining the overall direction on a higher time frame and trading in that direction, you make sure that you trade in the direction of the overall trend – this increases your chances of profitable trades.
Forex traders are often tempted by the lure of lower time frame charts; they think they are somehow getting closer to the “real” action in the market and that they will find more trading opportunities on these fast moving charts. The reality of the situation is that the lower in time frame you go the less accurate any trade setup becomes, therefore, by trading lower time frame charts all you are doing is lowering the probability that any trade you take will be a winner by adding more variables to the equation of forex trading.
One of the biggest advantages of trading the higher time frame charts is that they act like filters of price movement. The forex market has such high daily trading volume, that the lower time frame charts contain what market technicians refer to as “noise”. The noise of the lower time frames is basically just price movement that is so erratic that it cannot be reliably used to make trading decisions; however, many traders get tempted by this erratic price movement because the human mind naturally tries to find patterns in nature and in the financial markets.
Forex traders who analyze and trade lower time frames are missing out on the power of higher time frame charts. By adopting a longer-term view of the market, you can effectively filter out more false signals and losing trades that result from trading lower time frames. Higher time frames give fewer trade signals and also the signals they provide are more reliable and more profitable. Trading the higher time frames has a greater risk/reward for returns generally, and also without the stress and time commitment needed for constantly monitoring your trades every few minutes.