Forex Short-Term Trading: Pros and Cons
September 21, 2021
The time frame is one of the parameters that traders of all levels and types must pay the utmost attention to if they intend to optimize their trading activity and make it truly profitable. Unfortunately, the issue is more complex than one might imagine, as there are numerous time frames available, and all of them affect the way the trader "sees" prices. Therefore, it is necessary to choose the time frame that best suits your needs.
The choice is usually between long time frames and short time frames. In this article, after a brief overview of time frames in general, we will discuss the "short" type, its advantages and disadvantages. We will also describe the cases in which it should be used and the cases in which it would be better to avoid it. Finally, we will provide general coordinates so that each trader, especially beginners (usually baffled when facing this crossroads), can make the most suitable choice.
What is a time frame
The meaning of time frame is, in a sense, encapsulated in its name. Literally, it means "time frame." And indeed, that's exactly what it is: the time frame that circumscribes the chart. Specifically, the time frame indicates the frequency with which prices appear on the screen. So a 1-hour time frame shows prices as they are at a distance of one hour from each other. It may seem like a small difference, but it profoundly affects the appearance of the chart and, consequently, the analysis activities of the same.
As already mentioned, there are long time frames and short time frames. Generally, short time frames are those of 1 minute, 5 minutes, 10 minutes, 15 minutes, 30 minutes, and 60 minutes. Long time frames are those of 1 day, 1 week, and 1 month.
The beginner trader, therefore, is called upon to decide the time frame with which to operate. This choice also concerns the long-time trader if they change their strategy. Also because the time frame should be chosen not based on convenience criteria, but on effectiveness and compatibility. Specifically, compatibility with one's trading strategy.
Pros and cons of the short timeframe
As already announced, we will now delve into short time frames. Like any other parameter, time frames also have pros and cons, and they pair better with some situations than with others.
The biggest advantage of short time frames is the ability to look more deeply and in detail at price movements. Obviously, the shorter it is, the greater the level of detail. This can be beneficial in some specific contexts, namely when practicing a form of fast trading.
However, short time frames are characterized by a rather heavy downside. In simple terms, they have significant disadvantages. The issue is both technical and psychological.
From a technical point of view, a short time frame increases the on-screen representation of "noise," i.e., oscillations, which are mostly statistical and random, that do not depend on and have almost nothing to do with the trend. So the trader is more easily mistaken and can draw false signals of reversal or, conversely, of trend confirmation.
From a psychological point of view, the time frame, if not managed expertly, can cause a lot of damage. A trader who sees so many oscillations on the screen can remain entangled in a condition of tension and stress. They have to handle many more stimuli, as each price movement poses a question.
The use of short time frames, and the dynamics underlying it, give rise to a reflection on the relationship between trader and psychology. In particular, they determine the need, especially for the beginner trader, to resist pressures, to act regardless of the emotions they feel. In short, when using short time frames, it is more necessary than ever to keep the bar straight, if only because the sea appears stormier and raises fear.
It is not easy to take care of one's psychological sphere in relation to trading activities. In fact, it is the only element that even the most complete training path fails to convey. It takes time and a certain amount of work on oneself. It will be a great effort, but not a wasted one. The skills you develop will be useful in everyday life.
How to choose your timeframe
We have just seen that the short time frame exposes one to risks. Does this mean that it should not be considered? The answer is obviously no. In some cases, it can not only be preferred but must be.
This is the case with fast trading forms, which refers to all approaches from Day Trading downwards. Day Trading, as you surely know, is the trading activity that involves closing positions within the day. It is an approach that can be particularly useful for reducing costs and, in particular, eliminating overnight rates. It is an approach that aims to profit not from trends, but from daily fluctuations.
Certainly, short timeframes - but not very short ones - should be used when one's activity is anything but "slow." Therefore, when you are not engaged in position trading or particularly unhurried Swing Trading.
There are situations where even the shortest time frames, those below 30 minutes, should be used. The reference is to Scalping, which involves the frenetic opening and closing of positions, in order to exploit micro-oscillations (which are totally unrelated to trends). Scalpers earn very little from each trade, but they do it - or at least hope to - several times a day.
It is worth remembering that Scalping is an incredibly complex and risky strategy. The result, when positive, is really positive. Nevertheless, it exposes one to dramatic psychological pressures and is also difficult to manage from a technical point of view. It requires a quick and accurate understanding of the market, as well as extreme decision-making ability. Many decisions have to be made, and in the shortest possible time.
