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Time Frame or Periodicity

The time frame or periodicity of a price charts refers to the duration in time of a single price bar or candlestick. This can be anything from a tick to a year or even multiple years, depending on the amount of data that is available. The longer the time frame, the less frequent the number of signals that will be generated by the trading system. This is because a 5 minute chart will hold six times more price bars and price data than a 30 minute price chart, for example. Thus, a technical indicator applied to a 5-minute chart would change and move six times faster than the same indicator applied to a 30-minute chart. Furthermore, the shorter time frame charts will be subject to more noise due to the random nature and actions of buyers and sellers.

Choosing a Time Frame

Choosing a specific time frame within which you will trade is important as the time frame must suit your personality and trading style. Some traders prefer the hourly burly of a 5-minute chart with its relatively high frequency of trades while others will prefer the more calm nature of a 30-minute chart that smooths out the "noise" of a 5-minute chart.

Many novice traders are led to believe that the shorter time frame is where money is made; even traders that are successful on a longer time-frame can be tempted to switch to a shorter time frame. However, the shorter time-frame is not always more profitable. It is more difficult to trade as there is less time available to the trader to make a trading decision with an entry price, a stop level and a target price, and volatility at the faster and shorter time frames and the smaller ranges means that slippage will often consume a larger proportion of the available profits. A proportionally larger slippage on both entry and exit also reduces the risk/reward ratio. This makes a shorter time-frame less attractive than a longer time-frame for most traders.

Furthermore, changing to a shorter and faster time frame can be a painful and expensive experience as the trader adjusts to nature of a faster moving price chart. Often a trader will not be able to make this adjustment successfully. Those moving to a longer, and slower, time-frame, on the other hand, are usually able to make the adjustment despite initial teething problems.

Multiple Time Frames

This does not mean that you should not consider the price action at different time frames to the one within which you are trading. Indeed, there are advantages of considering multiple time frames before taking a position. The most significant being that multiple time frames provide a context for the trade signals generated on a single time frame and increases the probability of those signals. This is particularly true of a higher time frame chart. A lower time frame chart can also be used to find more precise entry and exit points.

The various time frames you take into consideration should vary by a factor of 3 to 5. In other words, the time frame should be three to five times larger or smaller than your main time frame within which you trade. Thus, if you trade on a 30-minute chart, you could consult a 10-minute chart (three times smaller) for better entry and exit points and a 2-hour chart (four times larger) for the wider context. If reason for this is that the different time frames should provide more information without being too far removed from your actual trades. In our example, a 10-minute chart will provide information about the price action in each 30-minute bar, while a 20-minute chart would not show this action as the 20-minute and 30-minute charts will be very similar.

Lastly, while multiple time frames are useful for improving the probabilities of your trades, it should not be used to break your trading rules. You should not, for example, switch to higher time frame to look for reasons not to cut a losing position in contradiction to your trading rules.