Most professional traders trade at higher time frames, not at 1-minute, 5-minute, 15-minute, or the 30-minute charts. Beginning traders have the misconceptions that in order to be successful, they must trade the lower time frames. New traders who enter the market think that they can make a whopping amount of money within just minutes. But more often than not they will soon realize that it is not as easy as it may seem. Getting lucky a few times on the lower time frames is possible, but is overall not very reliable.
It’s a fact that most new and struggling traders trade way too much. They are too obsessed with trading the lower time frames because they focus exclusively on short term fluctuations of the market in an attempt to profit from every price movement. They put too much emphasis on analyzing the 30-minute, 5-minute, and 1-minute charts. Although there are many trading opportunities on these fast moving charts, there are also a lot of false signals. In reality, as you go into a lower timeframe, the less accurate a trade setup becomes. As you go into a higher timeframe, the more accurate a trade set up becomes. Thus, trading at lower time frames will lower the winning probability of any trade signals.
The Truth about Trading Lower Time Frames
When you look at and analyze the markets frequently throughout the day you are increasing your chances of executing a lower probability trade. Trading the lower timeframes is the fastest way to lose all your money in the markets. Some of the adverse effects of trading lower time frames are:
Induces and encourages over-trading
New traders are lured with the promise of getting rich quickly in the forex markets and so they start trading the lower time frames. The desire for quick success increases the appetite for more trades and high-frequency trading. Traders who don’t have trading plans and have not mastered any trading strategies often focus on these less profitable time frames. They sit in front of their computer for hours analyzing multiple lower timeframes and take every trade signal regardless of the risk. In fact, most traders who are not consistently profitable in the markets are over-trading. Staring at the computer screen for hours often tempts traders to take positions that they would not have taken if they were focusing on the daily charts.
More prone to noise and price-action whipsaws
When you are too focused on constantly looking at the 5-minute, 15-minute, or other lower time frames, you are tempted to perceive a potential trade which is merely random market noise. The noise or the erratic price movements cannot be reliably used to make sound trading decisions. With the prevalence of quantitative algorithmic and high-frequency computer trading, an intra-day trader has a tougher time analyzing the market since intra-day charts are full of false-signals and market noise.
High frequency computer traders have an unfair edge because they can quickly predict short term market directions and are capable of buying and selling many different securities in just a blink of an eye. Trading at lower time frames is just a waste of time frying your nerves in competing against super computers with unfair advantages.
Causes stress and insanity
So many traders end up glued to their screens and are too worried about their trades. Trading the M1, M5 or the M15 is so stressful, since you often have to monitor your trades every minute. It causes you to always think about your trades, even when you should be sleeping. This can drain you emotionally and mentally, and can have an adverse effect on your health.
Trading at lower timeframe is more difficult. In fact, as you dig deeper into lower time frames, the difficulty level increases. There is really no point to trade a difficult timeframe if you can instead trade on stress-free higher time frames. You’ll find it more difficult to manage your emotions due to high speed stress and frantic reaction involved in the lower time frames.
No time freedom
You are probably attracted to forex trading because of the financial and time freedom it can provide, not to sit in front of your computer for more than 15 hours a day. As there is great potential, you must understand that trading is not a get rich quick activity. To be profitable takes time and effort.
Lower time frames demand lots of attention since you have to check the market every 5 minutes in many cases with the lower timeframes. The lower the time frame, the more you have to check the markets. Sitting in front of your computer all day trying to trade a 5-minute chart is surely very stressful. For most traders, it really makes no sense to force money out of the market by scalping or intra-day trading. Note: This is not to say that scalping cannot be done profitably, but indeed that it is much harder to turn a consistent profit for most traders.
Why Most Successful Traders Trade On Higher Time Frames Only?
Trading on higher timeframes like the Daily and 4-Hour is more about letting the trades come to you. You only need to check the markets two or three times each day and look only for obvious trade signals. If there is no valid trade signal, then there is nothing to do. Traders need to understand that the market will still be there tomorrow, the next day, and for the rest of our lives. Some of the best traders of all time traded the higher timeframes and made patience their best friend.
As James B. Rogers, Jr. (Jim Rogers a.k.a. ‘The man in the bow tie’) stated in the “Market Wizards” book:
“One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do. Most people – not that I’m better than most people – always have to be playing; they always have to be doing something. They make a big play and say, “Boy, am I smart, I just tripled my money.” Then they rush out and have to do something else with that money. They can’t just sit there and wait for something new to develop.
I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up. I do nothing in the meantime. Even people who lose money in the market say, “I just lost my money, now I have to do something to make it back.” No, you don’t. You should sit there until you find something.”
Most traders do way too much by analyzing and trading lower time frames. They sit and ruminate over the market all day hoping and wishing for a trade. As a result they force a trade even if it isn’t there. They always have to be trading and always have to be doing something. The 4-hour and daily timeframes let you wait to trade only the best and most profitable setups. It’s the best way to save your capital for a solid opportunity that is just around the corner.
Reasons why most traders succeed in trading with higher time frames
Below are some of the reasons why most traders succeed in trading with higher time frames.
Removes emotional attachment to the market
Focusing on higher time frames is much better for traders who don’t want the stress of being glued to their charts every day. Even though there are less trading opportunities at these time frames, professionals don’t really care if they are in the market or not on any given day. This trading mindset and attitude completely eliminates emotional attachment to the market.
Acts as a filters to market chop and noise
Whatever your trading strategy or whatever technical indicators you use, by simply comparing a 30-minute chart to a 4-hour chart, you will easily notice how many failed trade setups are there on the lower time frame. There are more meaningless price movements on lower timeframes compared to the higher time frame counter parts.
If you were to look at one price bar or candlestick on a 4-hour chart, you will not see the 30-minute price incremental movements in that 4 hour period; instead, you would see the collective price movements of 30-minute price movements. Therefore, you get a clearer picture of what is happening in the market because the market noise of the lower time frame is eliminated. Analyzing the lower time frames is an inefficient and ineffective use of time.
The picture above shows 5-minute EURUSD chart with a number of ups and downs and this is where a lot of trades may see many opportunities to enter the market. I do not say that you cannot make money trading this chart, but just look at the image below where the same is displayed on a 4-hour chart. It’s just couple of 4-hour price bars going down.
Offers trading simplicity and reliability
Trading the lower time frame charts is over-complicating the trading process because of trying to analyze the inherent market noise of fast moving charts. This inevitably causes over-trading which causes trading failure. At higher timeframes, it’s easier to analyze and predict market movements. You can easily identify trends and price patterns. Higher time frame charts provide more accurate depictions of price movements, which makes you more confident in your trading decisions. Unlike the lower time frames which need quick decisions, the higher time frame gives you enough time to analyze and correct your decisions.
Fosters patience, self-discipline, and self-mastery
Patience is one of the keys to trading success. No wonder then that successful traders are the ones taking a longer term view of the market and trading only at higher time frames. Although, they naturally take far fewer trades than traders who mainly trade at lower time frames, they make more money compared to day traders because higher time frames have greater risk rewards and more accurate trade setups.
Trading less is often overlooked by many traders because they erroneously believe that more trades are better and more profitable. They are best compared to a “machine gunner” shooting every trade set up regardless of the risk. Whereas, higher time frame traders who have mastered, or are still mastering a trading strategy, know what to look for in the markets. They patiently wait for the perfect setup before they fire a single bullet. They are compared to a disciplined and patient “sniper”.
Patience, self-discipline, and self-mastery are the lucrative trading traits that you can develop by trading with the higher timeframes. Not trading when there is no obvious trade signal means not losing money, and not losing money is the same as making money since there is nothing to make back. In other words, you didn’t lose any money so you have nothing to try to make it back.
Adds weight to trading signals
Sticking to trading only higher times frames adds weight to your trading strategy. Any trading strategy is more efficient on higher time frames because of the aggregate market sentiment. Combining your trading approach with the power of trading higher time frames can prove profitable. Many traders feel that the daily timeframe is one of their most important assets.
The best way to develop a proper trading mindset
By focusing on higher timeframes, you are also developing a proper trading mindset. You will naturally become a more objective trader rather than over-analyzing the market and trying to manifest every trading signal on lower time frames. Objective traders know what they are looking for in the markets and take the signals with confidence when the opportunity comes.
Stick to the Daily or 4-Hour Chart
The best time frames to trade are the daily and 4-hour charts. These time frames allow you more time to make your decisions and are also more accurate by their very nature. In reality, day traders or traders who enter multiple positions per day and close the trades in the same day are less profitable than longer-term swing traders. The daily and 4-hour chart allows you to set and forget your trades. Meaning you set your trades by placing instant or pending orders with logical stop loss and take profit targets, and walk away from your computer. You let the market run its course until it hits your target or your stop loss. In this way, you spend less time meddling with your trades. The less time you spend looking at your chart while you have an open position, the less chance you have of committing an emotional trading mistake.
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 timeframes 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. They don’t require constant attention that the smaller time frames demand. This gives you the freedom to do other daily activities, and more importantly, it allows you to enjoy a balanced life. Higher time frames make your life a lot easier.
So what is your favorite time frame?