5 minute candles? Hourlies? Dailies?
Which is the best timeframe to trade? And which will make me the most successful?
Here I’ll zone in on the unique features of each timeframe to find the one that offers the best opportunities for you …
What is a timeframe?
In the world of trading, Japanese candlesticks have become the dominant way of viewing prices and watching how those prices change.
Each candlestick represents a period of time … and that period is what’s known as the ‘timeframe’ you’re trading.
So, if each candlestick on your chart represents 5 minutes … you’re trading the 5-minute timeframe.
If each candlestick represents an hour … then you’re trading the hourly timeframe.
And the timeframe on the chart you’re watching will be linked to the timescale you’re expecting that trade to run for. You wouldn’t expect to be looking at a 5 minute chart, and then running that trade for days or weeks – quite simply, any action you view on 5 minute charts will be old news within the next hour or so.
Likewise, you don’t expect to be looking at daily charts to grab a profit in the next 10 minutes – you’re more likely to be running a position triggered on a daily chart for several days.
So, timeframes are about a lot more than just the charts we bring up … they are about how long you want to wait for your profits … how patient you can be … how quickly you can make decisions … how often you’re prepared to look back at your screens … and a lot more …
Which timeframe makes the most money?
It may surprise you to hear that this is actually one of the easiest questions to answer about timeframes.
Hands down, one group of traders make more money than others – and that’s those who trade longer timeframes.
Traders who hold positions for days, weeks, even months consistently outperform those who dip in and out of the markets several times a day.
But that’s not to say that this style of investing is the best one for every trader – for specific reasons that I’ll come to in a moment.
Which timeframe is cheapest to trade?
Traders following longer timeframes are likely to be looking at making themselves 40 … 80 … 150 points/pips in profit at a time. If their broker is charging them a 2 point spread on that trade, it’ll make only a small dent on those profits.
However, traders who are looking to grab 10 points from a quick trade that’ll only be open for half an hour, will be giving up 20% of those profits in spread charges to their broker.
Holding positions overnight will incur rolling costs from your broker (unless you’re trading a futures contract, where this cost is already built into a higher spread) – however, this is minimal compared to the effect of a 2 point spread on a 10 point profit.
However, there’s a flipside to this …
If you’re trading with a 100-point target and a 100-point stop distance, and a stake of £1 per point, then you’re risking £100 on that trade.
While, if you’re trading with a 10-point target and a 10-point stop distance, and a stake of £1 … then you’re risking just £10 on that trade.
So, there’s an obvious attraction to shorter timeframes for those with smaller funds, who are keen to be sensible with their risk levels. Taking longer term positions on daily or weekly charts tends to involve having a larger starting bank to work with, especially if you want to run multiple positions.
So, which timeframe is best for beginners?
Longer timeframes are, without doubt, the simplest to use – and the most forgiving of errors. If you get a late entry, or close a bit early, or a bit late … it shouldn’t be the end of the world.
Trading off a daily chart gives you plenty of thinking time, without the pressure of pips ticking away while you hover your finger over the ‘buy’ or ‘sell’ button.
However, there’s a lot to be said for the many, many (some of them terrible) trading decisions I’ve made over the years on 5 minute charts! Shorter timeframes where there are plenty of opportunities, decisions must be made quickly, and mistakes are brutally punished … make an incredible training ground for anyone looking to make money from the markets. However, I’d urge you to do this while keeping your risk levels very tight!
In short, the right timeframe for you, comes down to your personality … the size of your trading fund … and your trading style.
This summary may help you find the right way for you …
Of course, there’s no rule that you have to stick to just one timeframe when you’re trading! If you’d like to find out more about using multiple timeframes, check out this post here.