If there’s one fundamental rule that forex traders must adhere to, it’s to ‘buy low’ and ‘sell high’.
This is an obvious assertion, of course, but one that also underlines the importance of timing individual forex traders when attempting to optimise profitability.
This is especially important to scalpers and day traders, but what exactly is the importance of timing in the world of forex trading? Let’s find out!
Understanding Time-frames in Forex Trading
You’ll often hear the term “time-frames” used by forex traders, with this referring to any designated unit of time in which trading takes place.
Usually, forex time-frames will be measured in minutes, hours, days or weeks, and you’ll have to choose the right option to suit your precise trading strategy. So, once you’ve carried out your market research and identified which type of trader you want to be, you can begin to trade forex using time-frame analysis.
Make no mistake; there’s a direct correlation between your chosen time-frame and overarching forex trading strategy. So, if you’re a scalper who likes to execute hundreds of trades within relatively small periods of time, you’ll need to utilise one-minute time-frames to monitor the trajectory of its price movements before deciding whether to buy or sell.
At the other end of the spectrum sit so-called “position” traders, who tend to adopt a long-term investment outlook and open positions in the hope that they’ll increase in value over a period of months.
Due to the fundamental nature of position trading, investors will see their activity levels diminish, so they’re likely to work within extended time-frames that start from several weeks and can last for as long as one year.
How to Perform Multiple Time-Frame Analysis
Of course, not all currency pairs have been created equal, and it’s important to experiment with different assets (ideally when using a demo account) to identify as many trading opportunities as possible.
This is where multiple time-frame analysis enters the fray, as this involves analysis of specific currency pairs across a number of alternative time-frames to create an optimal trading strategy.
In general terms, most traders will start by selecting one longer time-frame and a shorter option, while utilising a ratio of 1:4 or 1:6 alongside a four or six-hour chart.
The longer time-frame is typically used to establish a viable and visible trend, whereas the shorter option can be used to identify optimal entry points into the marketplace and further inform your trades.
In some instances, a third medium-term time-frame can then be introduced to allow for more granular market analysis, creating a greater level of insight and potential minimising your risk in the process.
As we;ve already touched on, you should look to experiment with multiple time-frames while using a demo account, which should be made available through your chosen forex trading platform for a period of between three and six months.
You can access this after signing up for an account with an online brokerage platform, before honing your strategies and leveraging time-frames to increase your chances of success over time.