Technical analysis is a powerful tool to predict future price movements. Therefore, it is used by short term traders and long term traders alike. This fact confuses many new traders: How can one tool generate valid predictions for traders looking to hold an asset for months and for traders holding an asset no longer than a few hours? The tool that allows technical analysis such great flexibility is the use of different time frames.
In this article we will look at the different time frames and how they can help you to make more money by trading binary options. In detail, we will focus on these questions:
- What are time frames?
- Why should I use time frames for my trading?
- How do I trade different time frames?
- Are there limits to using time frames for binary options?
With the answers to these questions, you will be able to use time frames to make your trading more profitable and less risky.
What are time frames?
Time frames are a tool that can help you unlock the market’s secrets on multiple levels.
The issue with displaying market movements is that there are so many of them. Especially popular assets move up and down every second, which creates a wealth of information about what happened with the asset this day.
Most of this information is irrelevant to many trades. A trader that wants to buy a stock in preparation for retirement has no need to worry about whether an asset moved up or down over the last few seconds. They need a way to focus on the big picture, of aggregating all information in a way that provides them with all relevant information, but nothing more and nothing less. Similarly, a trader that wants to buy a stock for the next hour needs different information than a trader that wants to buy an asset for half a year.
To provide all types of trades with the information they need to trade well, technical analysts have developed a tool called candlesticks. Candlesticks are a way to display price movements in price charts, and candlesticks are the reason why you need to know about time frames.
Each candlestick summarizes market movements of a certain time period and displays them in one candlestick. The genius of candlesticks is that they manage to display all relevant information in only four prices: the opening and the closing price of each period, which are connected by a thick line, and the high and the low of each period, which are displayed as thin lines at the end of each candlestick. If the candlestick is white or green, the period featured rising prices; if the candlestick is black or red, the period featured falling prices.
With these four prices, you know everything about a time period that you have to know. You know the full trading range, you know every price within it, and you know how the opening and the closing price relate to the full trading range. Line charts, the type of charts most traders now from TV, only use one price per period to create their lines, which is why candlesticks provide you with a much more accurate understanding of what happened to the market.
Time frames define the length of the time period each candlestick summarizes. If you are trading a chart with a 5-minute time frame, for example, each candlestick represents 5 minutes of market movements. Therefore, a chart with 60 5-minute candlesticks displays the market movements of the last 300 minutes or the last 5 hours. A chart with a one-hour time frame, however, summarizes one hour of market movements per candlestick, and in a chart with 60 one-hour candlesticks, you see the market movements of four and a half days.
When you keep the exact same chart but change its time frame to 4-hours, each candlestick will represent the market movements of 4 hours. Therefore, the entire 60-candlestick chart now displays the market movements of the last 240 hours or the last 10 days.
The genius part of candlesticks is that they allow you to zoom in and out on market movements without losing a single movement. You always get all the information, but it is presented in the most effective way, which helps you to make the best decision.
Because of the different time frames, candlestick charts often look very similar, even though they display very different price movements and very different period of time. Therefore, you should trade them differently.
Why should I use time frames for my trading?
Using different time frames provides a number of advantages that can make your trading easier and more profitable. Let’s look at each of them individually:
Advantage 1: Time frames help you find trading opportunities in any market
Sometimes, the market is moving sideways. Upwards and downwards movements alternate randomly, and there is nothing that could help you predict whether prices will rise or fall in the future. Without using different time frames, such sideways movements would leave you without a trading opportunity.
Similarly, there are markets in which trading volume is too low to allow quality predictions, and there are markets in which it is impossible to find trends. These markets would leave you without trading opportunities, too.
A trader that understands time frames, however, can zoom in or out on the market and find environments that offer plenty of trading opportunities. What looks like a boring sideways movement on a one-hour time frame is likely to turn into a number of small upwards and downwards trends when you zoom in on the movement, for example by moving to a 5-minute time frame.
Each of these trends provides you with the possibility to trade the trend as a whole and the possibility to trade each swing individually. On the whole, most traders will get at least four or five trades of a movement that looked untradeable on the longer time frame – not a bad deal.
Similarly, random short-term movements often turn into parts of bigger movements once you zoom out on them.
Switching the time frame helps you to look at the same market from a different perspective. With so many time frames available, there is always one-time frame that offers you the right perspective to find a trading opportunity in any market environment.
Advantage 2: Time frames help you find more trading opportunities
Being able to look at the same market from different perspectives can help you to find more trading possibilities than if you would look at the market from only one perspective.
Even if the market offers you a trading opportunity on your current time frame, there is no reason why you should not zoom in or out once you have invested in this opportunity. By varying your time frame constantly, you will find more trading opportunities, and you will be able to maximize your profits.
Often, these additional trading opportunities result from the opportunity you already invested in, which makes them easy to find and easy to integrate into your trading strategy. If you invested in a swing on an uptrend, for example, switching to a shorter time frame will likely display this swing as a trend in itself. Now you have more swings that you can trade with the same strategy with which that you traded the bigger swing. Switching to a longer time frame will display your current trend as part of a bigger movement, which you can trade, too.
The entire process is easy and straightforward, and it can multiply your profit while only requiring minimal extra effort and knowledge.
Advantage 3: Time frames help you adjust your trading to your personality
While different time frames follow the same basic rules of technical analysis, longer and shorter time frames have unique characteristics that make them the perfect fit for specific traders that mirror these characteristics in their personalities.
Generally, shorter time frames are more nervous and erratic than longer time frames. Consequently, they are a little more difficult to predict, especially for newcomers. Nonetheless, even experienced traders will likely win a little less of their trades than they would on longer time frames.
Shorter time frames can make up for this disadvantage, though. They allow you to find far more trading opportunities than longer time frames, which can help you to maximize your overall profit despite reducing your winning percentage. It pays more to win 70 percent of 100 trades than to win 80 percent of 20 trades.
The deciding factor for whether shorter or longer time frames will help you to make money is whether you can maintain a high enough winning percentage on shorter time frames. If so, great. The higher number of trading opportunities will help you to make more money. If not, however, you might start losing money on shorter time frames.
The key to maximizing your profits is now how much you can shorten your time frame and still make money.
To find this sweet spot, you have to adapt your trading to your personality. Shorter time frames feature more risks but provide higher rewards, which means that they are ideal for traders that like to take risks. Traders that want to keep things safe and prefer straightforward investments, on the other hand, should stick to longer time frames.
By allowing you to adapt your trading to the risk level that enables you to maximize your profits, time frames put you in the perfect position to make money and feel comfortable.
Advantage 4: Time frames help you to understand your current movement better
Even if you know that you can make the most money by trading movements on a time frame of 5 minutes, other time frames still have a lot to offer for you to help you trade better.
Assume that you have found a trend that you want to trade. Knowing this trend by itself provides you with an opportunity, but by double-checking the opportunity with other time frames, you will be able to understand the opportunity better and might learn something that will allow you to avoid an investment that was doomed to fail.
By switching from a 5-minute time frame to a 1-hour time frame, you will understand how your current trend fits into the bigger picture. If the market is nearing a resistance or support or if there is any other nearby event on a longer time frame, you should know this event and understand its consequences before you invest in the trend on a shorter time frame.
If you want to trade an uptrend, for example, switching to a longer time frame might help you to recognize a nearby resistance that will likely force the trend to turn around. You know that this would be a bad investment and can avoid a losing trade. Instead, you might be able to trade a ladder option to predict that the market will not break the resistance.
In this way, longer time frames can not only help you avoid bad trades, but they can also provide you with trading opportunities that are not yet visible in shorter time frames. By knowing that the market is moving in an upwards trend on a longer time frame, you can anticipate how this trend will affect shorter time frames and invest in this effects before they are visible. This way of trading can improve your timing, which will increase your winning percentage and enable you to get better payouts.
Finally, there are some trading opportunities that you should always search for on a longer time frame but trade on a shorter time frame. The most notable example of this trading style is the breakout. The breakout is a strong movement that occurs when an asset has completed a price formation or any other significant event of technical analysis.
If you discover a continuation pattern, the breakout will occur when the asset completes the formation and resumes the previous trend. At this moment, many traders realize that the market has resumed its original direction and that they could make money by investing in this movement, which will result in a strong but short movement in this direction.
This movement is ideal to win a binary option. The problem is this: if you find the pattern on a time frame of one hour, the breakout will nonetheless only last a minute or two. After that, everybody that waited for the market to breakout has invested in the movement, and the trend will continue at its original speed. This makes it impossible to trade the breakout from such a long time frame as one hour. Your timing would be too inaccurate, and it would be impossible to anticipate the breakout precisely.
To solve this problem, a trader that understands time frames will switch to a shorter time frame. On this time frame, they can find the trend that will take the market out of the continuation pattern, which allows the trader to time their investment accurately and invest precisely when the breakout is about to happen.
With such a spot-on timing, the trader can invest in a one touch option exactly at the right time, which helps them to keep their expiry short and their target price high. The consequence is a higher payout and a higher winning percentage, which will both result in a higher profit. This is the power of understanding time frames
How do I trade different time frames?
Time frames influence your trading in many ways. We will look at each of these ways individually, starting with the most important way: the connection between your time frame and your expiry.
How does my time frame influence my expiry?
As a binary options trader, it is important to know the connection between the time frame of a chart and the expiration time you should use for your binary option. If you trade the exact same event in a chart with a time frame of 5 minutes and a chart with a time frame of 1 hour, for example, you should use vastly different expiration times for your binary option.
In general, as long as you are investing in a touch option or a boundary option, you take the longest expiration time you can get with a reasonable target price. After all, you win the option if the market hits the target price even once before the option expires. The longer the expiration time, the higher your chance.
With high / low options, however, things are a little more complicated. If you trade a longer time frame, such as a one-hour time frame, with a short expiration time, shorter market movements can ruin your trade before the market had time to develop the movement you invested in. If you trade a short time frame with a long expiration time, on the other hand, the movement you invested in will be long over by the time your options expires.
Unfortunately, there is no definitive rule on how to know which expiration time is appropriate for your time frame, as this connection largely depends on the strategy you are using. In the same time frame, a strategy trading breakouts requires a shorter expiration time than a strategy trading swings, which requires a shorter expiration time than a strategy following trends.
The best rule of thumb we can give you is this: never use an expiry that is longer than the event you want to trade. Estimate the number of periods the event will take, then multiply this number by the length of a single period, and you get your maximum expiry.
To trade a swing in a trend, look at past swings. If each of them lasted 10 periods on average, multiply 10 by the length of a single period. For a chart with one-hour periods, your maximum expiry would be 10 hours; for a chart with 5-minute periods, your maximum expiry would be 50 minutes. If the movement you want to invest in has already started, you should subtract the time that has already passed.
Use this rule of thumb to get your maximum expiry, and you should be on the safe side with your trading.
For trades of other movements, things are a little more complicated. To estimate which expiration time you should use for your current trade, you have to estimate the number of periods you think the movement you want to invest in will take to develop. After that, you simply multiply the number of periods with the time frame you are using.
Let us assume you are trading a breakout on a 15-minute time frame, and you predict that an asset will break out within the next candlestick. This means you would use a 15-minute expiration time for the binary option you want to invest in.
If you are trading a continuation pattern and are looking to trade a movement on a 5-minute time frame, take a look at all the preceding movements in the pattern. How long did they take to develop?
If each movement took somewhere between 15 and 20 candlesticks to develop, it is reasonable to assume that the current movement will be no different. (Some traders use an indicator such as the bandwidth to double-check this prediction, others simply take it as it is.)
If the current correction has already moved 3 candlesticks, you know that you probably have somewhere between 12 and 17 periods left. Multiplied by 5 minutes per period, this gives you somewhere between 60 and 85 minutes. Therefore, you should try to find an option with an expiration time of one hour or 75 minutes.
How does my time frame influence how much I should invest?
As we already mentioned, shorter time frames feature a more erratic market environment that makes predictions more difficult. Even if you are able to trade profitable in such a market environment, you should expect to win a lower percentage of your trades than on longer time frames. Consequently, you should reduce your investment per trade.
Managing your investment per trade is important to survive losing streaks. With no financial investment, you will win all of your trades. There is always a chance for a loss. Therefore, you have to expect to lose three, four, or more trades in a row.
The exact size of the losing streak you should prepare for depends on the riskiness of your strategy. With a risky strategy, you have to prepare for longer losing streaks. Consequently, you should expect longer losing streaks on shorter time frames.
The tool to prepare for losing streaks is a money management strategy. With a good money management strategy, you define a fixed small percentage of your total account balance that you invest on every single trade. Ideally, this percentage is less than 5 percent. This means, with an account balance of $5,000 and a money management strategy that invests 2 percent of your overall account balance, you would invest $100 in your next trade.
The key to successful trading is to invest less on shorter time frames. If you invest 4 percent of your overall account balance on a one-hour time frame, you should reduce your investment to 2 percent on a shorter time frame.
Generally, it is better to err on the side of caution. If you invest too little, you will make less profit, but that is something you can correct easily. If you invest too much, you might end up broke, and there is no coming back from that. Always remember: to make up for a 50 percent loss, you have to make a profit of 100 percent; so keep your losses small and you will help your net profit more than by increasing your returns slightly.
How does my time frame influence the strategy I trade?
Because the market moves more erratic on short time frames, it is more difficult to trade strategies that require long-term events. Most notably, trend followers will find it difficult to find suitable long-lasting trends on short-term time frames.
For traders of such strategies, it might make sense to switch to trading a more short-term focused event. Often, this only requires a minor tweak to their strategies. Traders that used to follow trends as a whole can switch to trading each swing individually, and they will have found a more short-term trading alternative that is based on the same basic phenomenon. Most strategies allow for a similar tweak that adapts them to shorter time frames.
Generally, shorter time frames work better with strategies that trade short, simple events. Simple candlestick formations will work better than continuation patterns, and volatility indicators will work better than long moving averages. Changing your trading strategy from one of these examples to the other should be simple. Continuation patterns are a part of candlestick analysis, and by trading simple candlestick formations, you will stick with the same trading style while only changing the event you are trading. Similarly, the switch from moving averages to momentum indicators helps you to stick with trading technical indicators and only switches the indicator you trade.
Such tweaks require minimum effort on your part, but they can make a significant difference in your earnings.
Are there limits to using time frames for binary options?
Time frames are a very helpful tool for your binary options trading, maybe even the most important one. They do, however, also have their limits. There are some time frames you should never trade with binary options and some that are of limited usefulness.
The most obvious limitation is that time frames of days, weeks, and months are impossible to trade with binary options. In a price where one candlestick aggregates the price movements of one month, you can easily see the market movements of multiple years or decades. Since binary options feature expiries of only a few hours, such long time scales are incapable of helping you make good decisions. The same applies to charts with a weekly time frame.
Daily charts can be important to understand what the market is doing and which big-picture technical events will influence the price today. You should, however, avoid trading daily charts directly. When you find a significant, switch to a shorter time frame and trade the event from there.
Shorter time frames can be of similarly limited usefulness. One-second time frames provide a much too erratic market environment to trade effectively. Even the shortest expiry you can find with binary options – the 30 seconds expiry of short-term options – is too long to make money. Other binary options types usually start their expiries at 5 minutes, which is even less suited for this trading environment.
We generally recommend staying away from time frames shorter than 30 seconds. Shorter time frames might seem attractive because they promise an almost endless amount of trading opportunities, but these opportunities usually look much better than they are. They are the result of random market movements and have no power to indicate future prices. By trading them, you are likely to lose too many of your trades to turn a profit.
Stick with time frames from 30 seconds to one hour for your trading. Stay away from shorter time frames and use longer time frames for additional diagnostic purposes only, but never trade them directly. Then you should be fine.
Time frames are a powerful tool that can improve your trading significantly. They can make your trading more profitable and less risky, which is a unique combination of advantages that few other tools allow.
There are two important things to understand about time frames:
- Different time frames influence each other. To make the best predictions on your current time frame, you have to understand how it relates to longer and shorter time frames and if these time frames limit the predictions you can make or allow for new predictions you are unable to recognize on your time frame alone.
- Shorter time frames provide more trading opportunities but also feature a more erratic market environment. To learn how to deal with these environments, we recommend you start by trading longer time frames and work your way down to shorter time frames.
When you understand these two main points, you can deduct most of the other points, for example how to manage your risk on each level and how long to choose your expiry.
If time frames seem a bit confusing at first, do not worry. It will not take long for you to learn the basics and get an intuitive feeling for the different time frames and how they influence each other. Start with the time frame that seems the most natural to you right now and work your way through the other time frames.
Time frames can improve your trading significantly, and every serious trader should take the time to learn and understand them.