Importance of Time Frames in Stock Market

What is Time Frame?

If you want to consistently make money in the markets, you need to learn to recognise an underlying trend and trade around it accordingly. One of the common proverbs indicates that if you “trade with the trend” and “don’t fight the tape”, the trend will become your friend. Now the question arises of how long a trend lasts? What is the right time to get into or out of a trade? Should you be a long-term or short-term trader? Well, all of these are answered in this article. Let’s dive in deeper to know the importance of time frames in the stock market.

A time frame is an essential parameter that helps analyse a specific pattern over a certain period of time. There are various frames available in stock trading that are popular among traders. Some of them are based on hourly, daily, weekly, monthly timespans. Traders mostly prefer the daily time frame among all of these frames.

Necessity of Multiple Time Frames

The crucial reason for researching several time spans is to provide the traders with a broader vision. It does not mean that you should check the market trends on a 1-week or 1-month chart to trade in the daily timespan. But if you do so, you are totally in a wrong concept. Let me explain the matter well. Suppose you have decided to go with the 1-hour trade span and are checking the past patterns on a weekly or monthly basis, then you will be making a huge mistake. There is a high possibility that the stocks that are in an uptrend on a 1-week or 1-month frame will also be in an uptrend in the 1-hour span. So based on the different long spans, you can not make decisions on what to expect in the short frames.

Moreover, remember that a particular stock may simultaneously have an uptrend or downtrend on multiple frames. I hope you have got my point about why there is a necessity for various time frames. So, choose the best one according to your trading style to boost your confidence at the time of trading.

What Time Frame You Should Follow

Generally speaking, the longer the time frame, the better it is for several reasons. Firstly, a longer time span provides more reliable signals. At the same time, as you drill down in time frames, the charts become more polluted with incorrect moves and noise. So, the better will be for the traders to use a longer time frame to understand the basic trend of whatever they are trading.

Once the underlying trend is determined, traders can use their preferred time span to define the specific trend as well as a faster time frame to determine the short-term trend. A few examples are mentioned below on which period would be applicable for whom.

Swing Traders – In swing trading, there are different time frames that you should focus on, such as 30 mins, 1 hour, 4 hours, daily, and weekly. But the question is where to apply what. So, if you are planning to do short-term trading, you should watch the patterns on 1 hour, 4 hours, and daily time zone. But on the other hand, if you are thinking of trading for a longer time span, meaning you want to hold your stocks for weeks or months, then look up the weekly or monthly patterns. Last but not least, you do not have to make many things right in swing trading, and that’s why it works great primarily.

Day Traders – If you are into day trading, also known as intra-day trading, then the weekly or monthly time frames are of no use. Most of the intra-day traders use 15 mins, 60 mins and daily charts to define the primary trend. Simultaneously, if you want to determine the short term pattern, then go for the 5 mins timeline.

Position Traders – A position trader purchases an investment for the long-term to expect the price to rise. Additionally, they are less concerned with short term fluctuations in stock price and the news of the day unless they change their long term view of the position. If you are into position trading, then you can watch the patterns by using the monthly timeline to understand the primary trend. At the same time, look up the daily charts to clarify entries and exits in a trade.

By summing up every trading style, I want to suggest that you first select a time frame that you want to trade on. Besides, your next step will be to choose the timelines below or above the specified time frame you have decided to do trading.

Overall, it would be best if you use the long term pattern to determine the trend, an intermediate-term chart to get the trading signal, and the short-term graph to clarify your entry and exit in a stock trade. Finally, do not get overly engaged in the noise of a short-term chart and analyse a stock excessively. Instead, follow the patterns as per your trading style in multiple time frames and remember a short term chart is typically used to either confirm or eliminate a hypothesis from the main chart.

Bottom Line

After you have decided to trade in a specific stock of a company, remember that you are not the only one in the room ready to do the execution. There are plenty of people who either buy or sell at the same time frame you are using. So, your first set of actions should be to choose the trading style and the time frame you prefer. In the next step, analyse the past patterns on the selected time span, followed by some below or above time frames to understand the trends better. Besides, never consider yourself the smartest trader because many other people who trade simultaneously could be better than you at analysing the patterns.

While you do trading, it is gravely important to examine the situation quickly and react accordingly. The quicker you determine the candlestick patterns in multiple time frames, the more you can do well in stock trading. Basically, you have to spot the support and resistance in numerous time frames, making your progress effortless to understand when to buy and sell your stocks.

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