Observations on exchange rate movements will also be influenced by the time element. Therefore, it is necessary to understand the meaning of the Time Frame in forex before trading.
When we start trading, it will open a trading platform such as Metatrader where prices in the forex market are displayed in graphic form.
Forex charts depict the price movement of a currency pair in the forex market, whether the movement is up, down, or static.
However, in practice, our observations of price movements will also be influenced by the Time Frame. Therefore, before analyzing price movements, we must first understand Time Frames in forex.
What is Time Frame in Forex?
Time Frame in forex is a specific period of time defined as the period of observation of price movements. In different time periods, the price conditions shown may be translated differently.
Publicly, for example, the EUR/USD currency pair weakened in the last 1 hour but strengthened in the last day. All this will appear on the forex chart when we change the attached Time Frame.
In practical terms, forex charts are formed from price movement data collected within a certain time frame. Therefore, if the Time Frame is changed, the price movement data can change.
For example, consider the comparison of price movements on EUR/USD in the 1-Hour Time Frame (Hourly/H1/M60) and the 1-Day Time Frame (Daily/D1) below.
On the Candlestick chart in the 1 Hour Time Frame, each candle represents the movement for 1 hour (opening, closing, high and low prices).
While in the 1-Day Time Frame, each candle describes the movement for 1 full day. The Time Frame unit shows the length of time it takes to form one candlestick; So the graph will vary depending on the Time Frame.
The most frequently used Time Frame units in forex are 1 Minute (M1), 5 Minutes (M5), 15 Minutes (M15), 30 Minutes (M30), 1 Hour (H1), 4 Hours (H4), 1 Day (D1 ), 1 Week (W1), and 1 Month (MN).
On the trading platform, a choice of several Time Frames is usually provided, and we can move around to determine which Time Frame is more suitable for use in forex trading activities.
Choosing a Time Frame in Forex
Choosing a Time Frame in forex is easy and difficult. In general, traders choose based on the trading system used. For example:
1. Scalping System User Trader
With a scalping system, traders can open and close transactions quickly, or even just a few minutes apart.
Therefore, traders like this usually use M1, M5, or a maximum of M30 Time Frame.
2. Trader User Day Trading System
As the name implies, ‘Day Trading’ means opening and closing forex transactions within the same day.
For Day Trading, the M30 to H1 Time Frame is usually used, plus H4 or D1 as a comparison time frame.
3. Swing System User Trader
With the Swing system, traders can open and hold transactions for up to several days, weeks, or even months.
Therefore, the Time Frame used ranges from H4 to W1 and MN.
Also read: What is Forex Market Sentiment?
Each trader can trade using one Time Frame or more. Low Time Frames are usually considered to contain too many disturbing fluctuations, while higher Time Frames are considered to represent the overall price trend better. Efforts to choose a Time Frame in forex also consider these factors.
After selecting the Time Frame, then what else needs to be done? In forex trading, choosing a Time Frame is just an “intro” aka the very first step before forex technical analysis. Next, you need to identify which is the Support and Resistance in the price movement of each currency pair.