Timeframes and Why They Matter

Any time you’re looking at a potential trade, you need to be very mindful of the timeframes. Most traders start as scalpers, because it allows them to trade often, and done properly, it’s actually profitable. The problem is that it soon becomes a full time job. You’re looking for trades that give you as little as 10 pips, and maybe, aggressively scalping, 25-50 pips at a time. Doing it properly is the trick, however, since if you’re looking to gain 10, 20, 30, or what the heck, 50 pips, you’d better be prepared to risk the same amount. At that point scalpers quickly realize that they need to be right more often than wrong. If you’re losing X pips every time you’re wrong, and winning X pips every time you’re right, then the only way you’ll make it is if your wins come in more often than your losers. If you win as many trades as you lose, then ideally you’d break even, but in reality, the spread or commission cost is going to diminish your account steadily. Win 6 out of 10 trades, and that winning net trade is maybe covering the cost of trading, again, those pesky spreads and commissions, and that’s without even getting into swaps (interest charged to you if you keep a trade open into the next trading session.

Personally, I have gone as low as being right 2 times out of 10, and still ended up with a net profit. How is that possible? Trade management. My wins are larger in pips gained than my combined losers, even though there are more of the latter. But I digress. We can talk trade management later. Back to timeframes…

When you’re scalping, you’re usually looking at 1-hour candles or smaller. Some scalpers live in the 5-minute candle world. If you’re good at picking trades, this can work, but like I said, you are going to be glued to your charts for hours. If you increase the timeframe and drop the scalper approach, you’ll find that while there are less entry signals triggered, the ones that are triggered tend to give better odds. More importantly, some of them will move 100 or more pips at a time, in days as opposed to minutes. This allows you to exit your losers at, say, 50 pips, and let your winners go on to 50, 100, 150, 200, sometimes more pips.

Now you don’t need to be right more times than wrong, and you can start seeing why I can have a terrible month where I only get 2 trades right out of every 10, and still end up with a net profit. Wouldn’t it be great if your worst month ever was still a net winner? And one where you don’t have the pressure of trying to be right more than half of the time? So trading at higher timeframes gives you:

  • More free time – No need to be glued to the charts, you can get away with a quick scan once a day, or twice a day, to look for good entries. And if you use trailing stops, the trades manage themselves once they move into profit. Just keep adding trades as you see good entries.
  • A better risk to reward ratio – If you’re now looking to risk 50 pips to make a 100, or 200, or 300, the odds start working in your favor very quickly. Add good entry signals, and they add up even quicker. Get to 60% wins, as I often do, and those 100s of pips start piling up on your side of the table.
  • A chance to follow long term trends – Most of my trades start with the idea of picking up at least 100 pips, but some trades can move a thousand pips in your favor, given enough time. So why get out early? If you set a trailing stop so you are protecting profit as the trade moves in your favor, what’s the rush? These are the big wins that can really grow an account. Leave them alone. Let them work for you. A few of my trades turn into these big winners, but I never know ahead of time which ones will or won’t. So I enter many trades, with valid entry signals, of course. Some lose, some break even or give me small profits, and some give up the 100 or 200 pips I wanted in the first place. But a very few turn into whales. Those I set free to run as far as they want. I do away with the limit altogether, and just let the trailing stop follow behind as it gives me pips. How long? I don’t care. As long as it continues to rack up more gains. My longest trade lasted 6 months and gave me 900 pips. Not bad for a trade that started with me looking for a 100. After the first week, none of my money was at risk, the only risk was the last 50 pips of profit it had captured. I just left it alone and concentrated on adding more trades.

And with all that, you can make good money by being wrong half the time, or worse. But you can’t do this on a 5 minute chart. You have to identify these potential swings on a daily or even weekly chart, make a mental note, and trade in that direction based on entries from the smaller timeframes. So all timeframes have their uses. Just don’t forget that the bigger timeframes rule the smaller, and if you’re only looking at the smaller timeframes, then you’re not seeing the forest for the trees.

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Founder and Director of Special FX Academy, Andres is now a full time trader, mentor, and writer. In the past, Andres has held director level positions at venerable trading exchanges including New York Stock Exchange, Euronext, and Fannie Mae. Buy his Forex Trading book here!

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