Choosing the Correct Timeframe to Trade

Forex Time Frames & Trading Styles

There are many ways to trade the Foreign Exchange Market and many different trading styles to choose. The main variable differentiating all trading styles is Time Frame used.

Five (5) Types of Retail Forex Traders

We could discriminate five different types of Forex traders in accordance with the Time Frame used (*):

1. Scalpers
2. Day traders
3. Swing Traders
4. Position Traders
5. Carry Traders

Choosing the Right Time Frame to Trade Forex

In general, the shorter the time frame you use the higher your trading cost will be, and the higher the time required to be devoted to monitoring your positions. The use of high capital leverage in day-trading forces stop-loss and take-profit orders to be placed narrow. Shorter Time Frames are more difficult to trade.

On the other hand, a wide Time Frame requires low capital leverage and wide stop-loss / take-profit orders. The time required to be devoted to monitoring your positions is a few hours per week.

Here are all five (5) different Forex Trading Styles:

(1) Forex Scalpers

• Time Frame: A few seconds to a few minutes
• Leverage: 100:1 or higher
• Trading Cost: High
• Risk and Reward: Very High

Forex scalpers trade the shortest time frame in Forex (except arbitrageurs). They are called scalpers because they try to scalp tiny changes in the fluctuations of currency prices. Scalping involves opening and closing trading positions in Time Frames that last from a few seconds to a few minutes. Scalpers aim to achieve a few pips from each trade (1-5 pips net profit). Scalpers need the tightest trading spreads and the fastest trade technology and that is why they trade exclusively with ECN Forex Brokers. Most brokers offering a Dealing Desk (DD) discourage scalping. On the other hand, ECN and STP Forex brokers (NDD) fully allow scalping. Forex Scalpers trade exclusively the Forex Majors and especially EURUSD and GBPUSD. Most of the time scalpers use automated Forex Systems which are called Expert Advisors or else Forex Robots.

(2) Day-Traders

• Time Frame: a few minutes to several Hours
• Leverage: 50:1 to 100:1
• Trading Cost: High
• Risk and Reward: Very High

Day-trading means opening and closing trade positions within the same day. Day-traders do not maintain their positions overnight in order to avoid the risk of unexpected news and to avoid Swap Rates. The Time Frame used ranges from a couple of minutes to several hours. Day traders usually perform technical analysis and try to find out signals of high-probability trading. Day-traders can also be News-Traders and open a position according to the latest Market News. The trading cost is a very important issue for Day-Traders that is why they trade also only with ECN Forex Brokers. Day-traders are very sensitive to the spreads they pay and usually trade only the Forex Majors or some considerably liquid Forex Crosses such is EURGBP.

Note: Forex crosses are currency pairs that do not involve the USD.

(3) Swing Traders

• Time Frame: 1 to 5 days
• Leverage: 5:1 to 50:1
• Trading Cost: Medium
• Risk and Reward: Medium to High

Swing traders may maintain their positions from 1 day to a couple of days. They don’t like to maintain their positions during weekends and therefore, their maximum Time Frame is five days. Unlike day traders, swing traders keep their positions overnight and are exposed to potential negative swap rates. For example, if a swing trader opens a long position of 5 lots on USDRUB he is exposed to a very negative interest rate differential. Moreover, swing traders are exposed to unexpected news and events and therefore, they must choose their capital leverage with extreme caution in order to leave enough space to their stop-loss orders. Many swing traders take advantage of trailing stop orders to secure their potential profits. We could say that a Swing-Trader needs to know a little bit about everything (technical analysis, fundamental analysis, etc.) and needs a Forex Brokers offering good spreads and good overnight swaps.

(4) Position Traders

• Time Frame: a couple of weeks to several months
• Leverage: 2:1 to 10:1
• Trading Cost: Low
• Risk and Reward: Low to Medium

Position traders are just like swing-traders except for the fact that they use much longer Time Frames and lower capital leverage. They can maintain their positions from a few weeks to several months. Position traders try to spot and to take advantage of strong long-term trends. They close their positions when a long-term trend runs out of strength.

(5) Carry Traders

• Time Frame: 1 to 12 months
• Leverage: 1:1 to 5:1
• Trading Cost: Very Low
• Risk and Reward: Low to Medium

Carry traders try to take advantage of the interest rate differential between two currencies. They open positions with a positive Swap rate. That means buying a currency that offers a considerably high-interest rate against another currency that offers a low-interest rate. Traditionally high-interest rates are offered by currencies such as NZD, AUD, and CAD. The lowest interest rates are offered by currencies such as JPY and CHF. By combining these two categories, you may find out which currency pairs are the favorites of carry-traders. The key factor for successful carry-trading is the Time of Entrance. Usually, carry traders choose to open positions after a major movement and trade in the opposite direction. The Swap overnight rates (rollover) is extremely important for this trading style.

(*) Arbitrageurs are not included in the above list as arbitrage is an extremely complicated practice requiring technology that retail traders can’t afford to acquire.