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The timeframe or periodicity of a price charts refers to the duration in time of a single price bar or candlestick. This is sometimes referred to as a trading session, and 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 timeframe, the less frequent the number of signals that will be generated by the trading system. This is because a 10-minute chart will hold six times more price bars and price data than a hourly price chart, for example. Thus, a technical indicator applied to a 10-minute chart would change and move six times faster than the same indicator applied to a hourly chart. Furthermore, the shorter timeframe charts will be subject to more noise due to the random nature and actions of buyers and sellers.

There are two important periods in technical analysis: the Open and the Close of the timeframe. This is when trading houses and institutions tend execute their trades: at the start or end of the trading day or week. However, these periods are less significant on the shorter intra-day timeframes as it would only be fellow day traders or speculators that would be trading at the close of a five-minute timeframe, for example.

Choosing a Timeframe

Choosing a specific timeframe within which you will trade is important as the timeframe 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 calmer nature of an hourly chart that smooths out the "noise" of a 5-minute chart.

Many traders also make the mistake of being mesmerized by the relatively quick price action on the shorter timeframes, believing that the shorter timeframe is where more money is to be made. Even traders that are successful on a longer timeframe can be tempted to switch to a shorter timeframe. However, the shorter timeframe is not always more profitable. Being able to trade more often, does not improve your risk/reward ratio, but does require a higher level of concentration and quicker trade executions as there is less time available for consideration. 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 timeframes 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 timeframe less attractive than a longer timeframe for most traders.

Furthermore, changing to a shorter and faster timeframe 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, timeframe, on the other hand, are usually able to make the adjustment despite initial teething problems. And again, it comes down to trading styles and trader personality - short timeframes do not suit every trader.

Multiple Timeframes

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

The various timeframes you take into consideration should vary by a factor of 3 to 5. In other words, the timeframe should be three to five times larger or smaller than your main timeframe 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. The reason for this is simply that the different timeframes, that you analysis around your main timeframe, should provide you with more information relevant to your main timeframe; therefore, it should not be too far removed from, or too close to, your main timeframe. In our example, a 10-minute chart will provide additional information about the price action in each 30-minute bar, while a 20-minute chart might not show the same price action as the 20-minute and 30-minute charts would be quite similar.

Lastly, while multiple timeframes 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 a higher timeframe to look for reasons not to cut a losing position as it is not the timeframe on which your trading rules are based.