Learn With ETMarkets: Choosing the right time frame in technical analysis (2024)

After grasping the fundamental principles of Technical Analysis and acquiring knowledge of different chart scales, including Arithmetic and Semi-Log, Maya started examining a multitude of price charts across various assets.

Some charts displayed continuous activity round the clock, such as forex, while others, like stocks, were only active during exchange hours. With daily charts as the initial point of reference, Maya found herself eager to explore other timeframe charts and gain a deeper understanding of their utility.

That's when she decided to seek guidance from Dev, who was always enthusiastic about discussing his passion.

Maya inquired, "Hi Dev! As I've been poring over multiple charts, I find myself a bit confused about which timeframes and data intervals are best for charting. Could you help me understand what to use for different types of analysis and what considerations to weigh when making these choices?"

Dev responded, "Absolutely, Maya! It's crucial to appreciate that timeframes and data intervals lie at the heart of technical analysis. They play a pivotal role in determining the level of detail and the duration of data under examination. For instance, when you study daily bar or candlestick charts, you're essentially scrutinizing just four price points: the open and close prices for the day along with the highest and lowest prices. These charts provide a broader picture, but they don't reveal the finer nuances of how price movements occurred within that day."

Maya inquired further, "I'm focusing on daily charts, so it means intraday trading is impractical due to the absence of intraday details on the chart. So, to engage in intraday trading, should I consider using charts with shorter timeframes like 15-minute intervals?

Dev responded with a smile, saying, "It's a bit of a 'yes' and 'no' situation," and proceeded to elaborate, "Just as daily candles lack intraday information, similarly the 15-minute candles provide no details beyond the open, close, high, and low of that specific 15-minute period. If your intraday strategy aligns with a 15-minute timeframe, utilizing the 15-minute charts is appropriate. However, if your strategy relies on minute-by-minute data, the 15-minute data interval may not be sufficient."

Maya sought clarification: "Understood. Likewise, if I go to a higher timeframe, for example weekly, which represents a week per candle, there's no daily data available. So, where do I begin?"

Dev replied: "First and foremost, one must know his or her risk tolerance levels. Generally speaking, higher timeframes have higher risk profile for example an instrument can easily lose 30% in a month, but it is rare for it to move 30% in a day. But as the risk is high the rewards are also higher because higher timeframes have less noise and trends are clearer with less whipsaws. The same way shorter timeframes have less risk as prices rarely move vertically and they also produce smaller average win percentage per trade with more whipsaws due to market noise but with more opportunities.

Secondly, you should consider your trading or investment horizon. Are you aiming to be a day trader, swing trader, or a long-term investor?"

Maya conveyed her inclination: "I lean more toward becoming a swing trader, as it allows me to hold positions for a few days to weeks without being overly concerned about intraday fluctuations."

Dev suggested: "In that case, you should focus on intermediate-term timeframes. Daily charts (1D) and 1-hour charts (1H) are commonly used for swing trading. These timeframes strike a balance, offering sufficient detail to spot trends and reversals without drowning you in market noise."

Maya sought further advice: "Great! What if I ever decide to explore intraday or day trading?"

Dev offered guidance: "For day trading, where the goal is to open and close positions within a single trading session, you need shorter timeframes. Consider using 30-minute (30M) to 5-minute (5M) charts for intraday analysis. These shorter intervals provide the granularity required for making quick decisions. Going lower than this might inadvertently pit you against high frequency, which may not be ideal unless you're tech savvy and have Algo Trading capabilities."

Maya continued her quest for knowledge: "On the other hand, what about long-term portfolio investors who have multi-year investment horizons?"

Dev provided insights: "Long-term investors have their sights set on the bigger picture. Therefore, weekly (1W) and monthly (1M) charts serve as valuable tools. These timeframes help filter out daily market noise, empowering you to make informed decisions for the long haul."

Maya probed for additional advice: "This all makes sense. But how about selecting data from different exchanges when multiple exchanges trade the same instruments?"

Dev emphasized the importance of data source selection: "The general rule of thumb is to choose data from the exchange where you intend to trade and which has more liquidity. It's crucial to understand that different exchanges can represent the same data differently, especially when it comes to intraday trading. For example, if one exchange starts trading at 9:00 GMT and another at 9:30 GMT, the hourly candles from the two exchanges will differ. The first exchange's candles will cover the time from 9 to 10, 10 to 11, and so on, while the second exchange's candles will represent intervals from 9:30 to 10:30, 10:30 to 11:30, and so forth."

"Excellent point, Dev," exclaimed Maya, "Is there anything else to keep in mind?"

Dev added another crucial consideration: "Certainly, there's one more aspect to be aware of. Not all candles necessarily represent the same amount of data. Take, for instance, the Indian markets, which operate from 9:15 IST to 15:30 IST. The final hourly candle you see accounts for only the last 15 minutes, from 15:15 to 15:30. You can choose to acknowledge or disregard that candle, depending on your strategy, particularly when assessing volumes within 1-hour intervals."

Finally, Dev underscored the importance of context, saying: "Remember that the choice of timeframes and data intervals should align with your trading strategy. Also, factor in the market's volatility. Highly volatile markets may require shorter timeframes for effective risk management. Additionally, stay attuned to price shocks due to economic events and news releases, as they can significantly influence the appropriateness of your chosen timeframe."

Maya expressed gratitude and comprehension: "Thank you, Dev! This conversation was exceptionally enlightening. I now have a much clearer understanding of how to select the right timeframes and data intervals for my technical analysis."

Dev concluded the discussion: "You're most welcome, Maya! Wishing you successful trading endeavors and remember to maintain a vigilant approach to your analysis. And don't forget the importance of choosing a reliable data supplier for accurate and timely data on your selected intervals."

Maya thanked Dev for his valuable guidance: "I genuinely appreciate your insights, Dev. They've been invaluable in shaping my understanding of technical analysis."

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)