Trading is a unique experience that each one of us approaches in a certain manner suitable to our personality. Some of us may enjoy the analytical part and could spend hours analyzing and creating heavily dictated scenarios while others may prefer spending less time analyzing charts and are more interested in making one trade occasionally without the burden of daily and hourly maintenance.
Regardless of our preferred trading style and approach to the markets, there’s no denying that technical analysis is an important aspect of a trader’s journey and an in-depth understanding of it can improve our entries, exits, and overall trade management.
When it comes to analyzing charts, there are a few elements that a trader can focus on to improve their overall strategy. One of them consists of looking at different time frames and analyzing trends within trends. For example, a trader may enjoy trading the hourly chart and could be set to take long positions given the positive momentum but a quick look at a 2 or 4-hour chart could reveal a downtrend with a correction higher that’s peaking which explains the positive short term momentum.
This is important to keep in mind as the positive momentum mentioned could quickly fade and give way to sudden weakness and new downside.
A rule of thumb is to always look at a slightly higher time frame and preferably double or four times the current one. For example, an hourly chart should be complemented by a look at the 2 or 4-hour chart while a 4-hour chart should be used in conjunction with an 8 or 12-hour chart. This ensures that the main time frame is in agreement with the overall trend of the higher time frame and would ensure bigger moves, better odds, and lower risk when initiating trades.
This also works in reverse and traders can look at a smaller time frame than the main one they use to pinpoint better entries which could decrease the overall risk associated with every trade. As you can see, there’s a pattern of increased confirmation, and traders can continue to do this until it becomes overwhelming or they are satisfied with the entry or exit of their trade. This does not mean a trader should keep looking at higher or lower time frames before placing a trade as it would be futile to attempt to find perfection.
Trading is no easy endeavor but also not an impossible one if done properly and analyzing charts is an essential piece of the puzzle that could help traders improve their chances of success and profitability. It’s important to find what works for you when studying markets and looking at multiple time frames is a sure-fire way to improve those odds.
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The content present in this article reflects the opinions and views of the author and does not necessarily reflect the position of CFI. The material published on this blog is provided for informational purposes only and should not be considered as investment advice. The Company is not responsible for the decisions and choices of the investor who has full and free will to make decisions that they see appropriate upon the investor’s sole discretion.