Most traders will agree on the importance of embracing market trends, regardless of what they’re trading. But what’s the easiest way to identify a market trend, and why is it so important? Tick tock, tick tock (there’s a clue in that)… have you gotten the answer yet?
Looking at something using time as the key variable gives you the opportunity to identify potential trends. Think about the weather. When you look at seasonal changes over a single day versus a month, the more information you have in order to spot movements and changes, even subtle ones.
The same rule applies in trading. Applying a specific time frame view enables traders to see a bigger picture. This makes it considerably easier to identify a market trend through analysis over a timeframe, and significantly narrow down any deviations caused by short-term price movements.
So let’s take a closer look at how you can choose a suitable time frame that will help you improve your trading. Whichever time frame view you apply should be based on how long you intend to spend trading per day, how long you intend to hold a position and even your personal trading style.
Trading can be a high-pressure environment, where you’ll constantly question your actions. Those who can withstand the heat, rapid market adjustments as a result of volatility, and can afford to spend more time trading, may select a shorter time frame since having a shorter time frame view enables you to get a closer view, so you can react quickly when opportunities arise. On the other hand, longer time frames are preferred by those who don’t have the luxury of being able to sit in front of the market charts for long periods of time.
Let’s take a look at an example.
Ann considers herself a day trader. She does not want to risk holding overnight positions, nor is she willing to pay the funding fees that would incur by holding long-term positions. So she applies the 15-minute time frame.
Apart from the 15-minute time frame, Ann is advised to pay attention to longer and shorter time frames as well. This will enable her to gain a more comprehensive understanding of the market, and thus, increase her chances of making a profitable trade.
Why do we need multiple time frames?
Let’s see if we can identify any key trends for BTCUSD under different time frames and see how it works in real-life.
The 15-minute chart above shows a clear upward trend. If Ann were to employ the trend trading strategy, she will need to determine the right entry point to go long.
After that, Ann adjusts the time frame to one-hour, to get a bigger picture view and see the broader market implications in order to identify an opportunity. The price of BTC here demonstrates a bullish pattern in this time frame, which provides more assurances of what was presented in the 15-minute time frame. Next, she zooms in even closer by switching to the five-minute time frame in order to identify an opportune entry time and price.
In conclusion, all three time frames indicate a rising trend, so Ann would undoubtedly open a position given the above market conditions.
Though the impact of multiple time frame analysis doesn’t seem especially significant, the actual market conditions won’t always be as ideal. The information displayed under different time frames tells us that the price of BTC can ascend and descend within the same period.
Experienced traders should already be aware of how multiple time-frame analysis can help them make more informed trading decisions, especially when navigating contradicting signals.
Let’s look at another example. Eric encounters a different scenario. In this situation, he selects BTCUSD too.
According to the 15-minute time frame above, the price appears to rise after experiencing a short dip, indicating the potential start of another bullish run. Eric was able to identify this, given that the price of BTC stays above the average price and maintains the uptrend for the most part.
To validate his hypothesis, he switches to the 4-hour chart in order to observe the overall price movements with a broader time frame. However, the figure shows that the overall BTC price is still experiencing a downward trend, signalling an opportunity to sell short.
In Eric’s case, by applying different time frame views, he’s able to see the bigger picture and verify his hypothesis. It’s possible that he would have made the wrong call had he just stuck to the 15-minute time frame view.
Observing a single time frame increases the chance of misinterpreting market trends. Although each scenario is different, it’s important to try and look at the information from different angles to get a better view.