Almost all Forex traders start trading using very short term charts, such as 5 or 10 minute charts. The main reason for this is that the financial markets are moving like crazy and this for the new entrant points to many business opportunities.
What these traders aren’t noticing is that, while there are a lot of opportunities within these short-term charts, there are also many more false signals included in them.
Shorter time intervals are known to kill traders’ accounts because of the pace at which they move and how erratic their movements can be. This can make it especially difficult for the new merchant to learn to operate effectively and make money.
The first thing these traders have to do is to recognize that, while short intervals mean more opportunities for entry, this does not mean equal opportunities for gain. Because of the factors mentioned above, more trading opportunities effectively mean more chances of losing money!
Why are long intervals better?
There are many benefits to using longer interval charts, such as daily or 4-hour charts. Some of these are:
The price action is more reliable
The market is not moving as fast as it used to.
The market doesn’t move as erratically
It is easier to define trends
Traders have time to make the right decisions
The best way to explain why a signal produced on the daily chart is more reliable than a signal produced on the 15-minute chart is to observe when the signal is made.
For example, if we have an internal bar on the 15-minute chart it means that traders will not be able to move the price of the previous high or low bars for the same 15 minutes. However, if we have an internal bar on the daily chart, it means that traders have traded across all sessions, including the US and UK over a 24-hour period and have been unable to move the price, either higher or lower than the previous session.
Clearly, we can learn much more from a price action signal that has 24-hour information than from one that has only 15 minutes of information.
The other example is a trader using a signal on the 15-minute chart. If a news item is published while the trader is in a trade, it will most likely stop after a few seconds. Even if this move is only 20 pips, it could cost you the trader your trade. If another trader was on a daily chart at the same time, this 20 pip movement barely even appears on his chart, and would not be as affected as the trader on the 15 minute chart.
Follow the daily charts
The best thing for traders when trying to learn how to make a profit is to use only daily chart signals. This will allow them time to make good decisions and also to use only good signals that are known not to be false.
Many traders will find this difficult but will also continue to have difficulty making money until they make the change. Of course, traders don’t always have to stick to the daily charts, but if you are losing money I recommend you give it a try at longer intervals. Once you start earning using longer time frame charts you may want to consider using shorter intervals.