To trade consistently, a trader needs to learn how to identify an underlying trend and trade it accordingly. When a trader tries to identify the trend, he has to decide the horizon for the money to be invested. It can either be intraday, short term, medium, or long term. He comes across various charts with various time frames ranging 1 min,3 min, 5 min,10 min,15 min,30 min, 1 hr, 4 hrs, daily, weekly, monthly, quarterly, half-yearly, and yearly charts. Whereas the larger time frame charts are used by positional traders who hold their positions for years on end, the smaller time frame charts are used by short-term, swing and intraday traders.
Understanding time frames is a crucial aspect of technical analysis and a deep insight into what they indicate assists one in analyzing price movements.
The most commonly used time frames are the monthly, weekly, and daily charts as they give a clear perspective of the markets and price movements. Not only do they help one in identifying major support and resistance levels, but they also help in identifying major trends, reversal points, and probable price targets. When one studies the price in the various time frames, he gets an insight into the direction of the market and the potential move it is likely to offer.
Time frames are used in conjunction with various indicators, oscillators, and chart patterns allowing one to formulate a trading system with appropriate entry and exit points.
The monthly chart projects the price range of a month where every bar or candle exhibits the price movement of a month. The monthly bars or candles plotted on the chart then allow one to understand the monthly movement of the stock.
The weekly chart projects the price range movement of a week where every candle or bar exhibits the price movement of a week. The weekly bars or candles plotted on the chart then allow one to decipher the weekly movement of the stock.
The daily chart projects the price range movement of a single day where every candle or bar exhibits the price movement of one day. The daily bars or candles thus plotted on the chart then allow one to study the daily movement of the stock.
The monthly, weekly, and daily charts are first analyzed and then the synopsis of this analysis is often used for intraday and swing trading.
For example, if one wishes to take a short-term position, one has to first analyze the monthly and weekly charts before he may take a position on the daily chart. A swing trader would normally analyze the weekly and daily chart before he would take a position on the hourly chart. An intraday trader would first analyze the daily and hourly chart before taking an intraday position.
Thus, as is apparent, understanding and effectively using time frames is extremely crucial for every trader and a thorough understanding of time frames is an essential part of the technical analysis.