I'd like to explain the pros and cons of using 5-minute charts all the way to investing in larger timeframes in the context of newbie traders.
Timeframes from 1-minute to 1-month candlesticks
3 reasons why newbies tend to choose lower timeframes
How to choose timeframe based on target
Advantages and disadvantages of different timeframes in trading
If you have traded for a couple of months, you are likely aware that you can zoom in on a price chart to see price action in more detail or even zoom out to see a broader outlook of price data from several weeks to even several years.
There are a lot of timeframes to choose frame depending on the chart platform you are doing your technical analysis from. We can simplify and categorize groups of timeframe for ease of discussion.
1. Lower timeframes - 1 minute to 30 minutes
2. Intermediate timeframes - 1 hour to 4 hours
3. Higher timeframes - 1 Day to 1 Month
Now a trader will need to decide whether to become a lower, intermediate or higher timeframe reader. This is similar to categorizing traders as scalpers, day traders, swing traders or position traders.
The biggest factor behind the decision to use smaller timeframe is the desire to earn quick profits. It's a very appealing idea to click BUY or SELL on your computer and 5 minutes later, you've made some money. But the big money is not made with the 'quick bucks' in trading. It is made from winning more trades than you lose over long periods of time.
"Remember that there are no short cuts son, quick buck artists come and go with every bull market but the steady players make it through the bear markets."
Newbie traders will almost always have a smaller account balance than more experienced traders. This makes sense because they have not yet gained the confidence to invest more money into the financial markets. But do remember this, because of the small account balance, there is often a wrong belief that they can only afford to risk a small number of points on a trade.
If a newbie trader has $100 in a trading account and whenever he is in a trade that moves a profit or loss by $10 per pip, then the rookie trader has to cut losses and take profits quickly hence forcing the use of lower timeframe strategies like scalping or day trading. An alternative to this is to reduce the size of trades. This way, the size of each point move can easily be manageable by the small account.
Another reason in mind why new traders choose short-term charts is because they think that longer term charts need them to wait longer. Newbie traders are notoriously impatient. they'd want to be in and out of trades for the sake of being in a trade. Most new traders fear of missing out and imagine set ups that are not even there in the first place. Then they'd get in a trade, set a stop loss and take profit levels, but can't stand 10 minutes without looking at the charts hence resulting in more anxiety and this leads to them moving the stop loss which may result in more losses or more popularly newbie take profit too soon once again because of the fear of losing the trade only to realize that the trade would have gone further in their favor.
Are higher timeframes better for forex newbies?
Not really. While we've explained the faulty reasons that new traders start with lower timeframes, but that's not to say that lower timeframes are all bad. A good benefit of using lower timeframes is that they give a trader more 'screen time', which is the only true way to learn trading.
A newbie trader is better off choosing a short term timeframe if they plan on holding trades for less than a day. It would be no good trading small price movement when using the Daily timeframe.
As a rule of thumb, If you plan on holding your trade for a shorter length of time, then a lower timeframe can do the job. The longer you're planning to hold on to a trade, then that is better served by a larger timeframe.
Advantages and Disadvantages of Different Timeframes
New traders can can experience quickly
More opportunities available
Fast-moving, less time to react and make decisions
New traders often get emotional seeing profits and losses quickly
Prone to switching strategies
Price moves take much longer to develop
More time to think through the merits of the trade and possible drawbacks
Less screen time
Better risk-to-reward ratio
Less stressful and not prone to emotional swings
Trades take longer to materialize
Less chance to practice
This offers the best of both worlds. A little more time to think but also plenty of chance to practice.
There is no one-size fits all approach in trading. Any trader can choose whichever timeframe is convenient. Hopefully, I was able to help you choose the right timeframe all for the right reasons... Good luck and Keep trading!