Online Forex traders using technical analysis are able to select the chart timeframe they would like to trade. The time frame is determined by the price movement being measured and displayed during the selected time frame. A five minute chart, for instance, means that the price movement of a currency is displayed as a bar, or candle or point every five minutes. The one hour chart would therefore reflect the price movements of sixty minutes in every bar or candle. Forex traders who scalp the market and like taking advantage of small movements in prices would therefore use one minute to fifteen minute charts. Swing trading long term Forex traders could use weekly and daily charts.
Often forex traders using charts with different timeframes face a trading dilemma. The trend can be up in one timeframe and down in another timeframe causing some confusion. This is especially tricky for beginners. It is conceivable that you can get strong buy signals in one time frame and a very strong sell signal in another. These inconsistent readings are often sited as one of the biggest weaknesses of using technical analysis in trading.
Experienced and skilled Forex traders have however found that they can use this strange market behaviour to their advantage. One of the most respected proponents of technical analysis, Dr Alexander Elder, has for years promoted a three time frame technique which has become a standard way of trading for many traders.
One would use three charts with three different timeframes. Generally the timeframes will have gaps of six to three. This fit well into the natural way chart are presented. Starting with the one minute chart and moving on: There are five one minute readings in a five minute chart, there a three five minute readings in a fifteen minute chart, there are four fifteen minute readings in one hour chart and there are four one hour readings in a four hour chart, there a six four hour readings in a daily chart and there are five daily readings in the weekly chart and finally there are four weekly readings in the monthly charts. One would then simply select any three charts that follow the above sequence as your trading charts.
Overnight swing traders will often select the weekly, daily and four hours from the above sequence. You can then use the longer term charts to establish the general direction of the trend. Once the trend is established you would only trade in the direction of the trend using the next chart to identify the trading opportunity. Once a trading opportunity is established the forex trader would then use the shortest time frame to enter the trade at the most opportune time.
The beauty of this method is that it can be adapted to any traders need. The scalping traders can use the fifteen minute, five minute and one minute charts in exactly the same way.
This three time frame Forex trading method can even be extended to more advanced applications. There are many groups of currencies that are natural hedges. You can use transactions in the EURUSD and USDJPY to hedge against movements in the EURJPY for instance. Some advanced Forex trading techniques use the three time frame technique on all three related currencies to pinpoint even stronger trading signals.