Forex traders will use a wide variety of different price charts when trading the various currency pairs. Some will prefer taking a long-term view, some will trade the 1 hour or 4 hour charts, whilst others will trade the short-term charts such as the 1 and 5 minute charts, and it’s these I want to focus on in this article.
The major appeal of these time frames is that trades don’t last very long. If you’re lucky you can bank plenty of quick profits, whilst cutting your losses early if trades go against you. On paper it sounds relatively easy, but the reality is that it’s extremely difficult to make money trading this way.
The obstacle you have to overcome straight away is of course the spread. The spread on some of the major currency pairs can easily be 3 or 4 points, so this means that a position has to move this amount of points in your favour before you even break-even. Furthermore if you have a bad feeling about a trade and want to close out at break-even, you will still lose around 3 or 4 points each time.
Another problem you have is that the trends on these shorter time frames are not very clear cut. Sure you may find a few short-term trends that are good for 20-50 points, but there will also be lots of occasions when a trend is over after about 5-10 points. Furthermore there will also be times when there is no distinct trend at all, and the market just seems to be moving sideways.
This makes trading extremely difficult, and is the primary reason why I recommend using the longer time frames such as the 1 hour, 4 hour or daily charts. Nevertheless you can still make money on the 1 minute or 5 minute charts if you’re clever.
The key to success is to look at the trends on the longer term charts, such as the ones I’ve just mentioned, and then use the 1 or 5 minute chart to get a good entry point. For example if a currency pair is trending upwards on the 15 minute and 1 hour chart, then it might be a good idea to enter a long position when the price is oversold on the 5 minute chart.
The point is that it is exceptionally difficult to generate consistent profits trading the shorter time frames. However it’s a lot easier if you make sure that you are always trading in the same direction as the long-term trend.
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