In this lesson, we will discuss candlestick charts, although the same principles also apply to bar charts.
A candlestick can represent a range of time periods such as 1 minute, 5 minutes, 15 minutes, 30 minutes, 1 hour, 4 hours, 1 day, 1 week or 1 month. These timeframes are available in our trading platform, MT4. In every case, the timeframe has to be defined, alongside the trading instrument in order for the viewer to understand what he or she is looking at. There are two primary reasons for using different timeframes when performing technical analysis.
Firstly, it has to do with the fact that different timeframes offer different perspectives on the trading instrument’s movement. A wider timeframe, like a day chart, provides a wider historical view but tends to pay less attention to detail. On the other hand, a narrower timeframe, such as a one-hour chart, allows for a more detailed analysis but covers a trading history of the instrument for a shorter period. It’s essentially a trade-off between detail in the price action and trading history.
Overall, analysing multiple timeframes could allow the trader to grasp the market’s multidimensional character.
The second reason for using different timeframes has to do with the trading strategy. Scalpers, who open and close positions in a matter of minutes may not be interested in the longer history of the trading instrument and instead focus on the current market situation, using a minute chart. On the other hand, a day trader who opens and closes positions within the same day may not require the detail provided by the minute chart and may prefer to use the one-hour chart which also provides some degree of history. Lastly, position traders who hold positions for weeks and months, prioritise day or weekly charts that provide a broader picture of the price action’s direction.
