The Importance of Time Frames. Lower vs Higher Time Frame Trading.
Written by Jared Stevenson, analyst at Eight Global
Disclaimer: This article is written from personal experience and gained after years of trading Cryptocurrency markets. Opinions expressed in this article are just those and should be subsequently tested and compared with your own experiences.
Have you ever sat down, ready to jump into an asset only to find yourself switching between a 15-minute chart to a daily chart back to the 1-hour chart. All the while every time you switch a different picture is painted? Confused, you evaluate them based on what looks the best and fits your bias, draw your S/R levels, maybe a wedge or two and enter the trade? Even if you haven’t it’s important to realize the critical role in how charting on different time frames have on your trading.
LTF — Lower Time Frame
Many people consider the range of a lower time frame chart between a 1–15-minute chart. However, personally I consider 1m — 4hr to be the threshold and thus will be labelled as such throughout this article. It is important to note, the grey area between the ranges and differences in labels is solely for the purpose of simplifying this guide. Scalp trading is performed on LTF. Day trading also to an extent.
HTF — Higher Time Frame
Any chart within the ranges of the 4 hour — Monthly.
It is important to note that while monthly charts and quite possibly yearly charts can be used in crypto. However the market moves so fast and is so volatile it’s advisable to generally stick to weekly charts as the upper limit of your HTF trading. Furthermore, daily charts remain the king (sweet spot). Often it provides the clearest picture in the fast moving cryptocurrency market. Swing trading and investing are more catered towards HTF.
Advantages of Lower Time Frame trading
Note: Bear in mind, these are examples only to fit the argument of LTF vs HTF trading.
Fast trades
Fast in-and-out scalp or day trades that take little time (usually mins to a day) but require you to be vigilant with your profit taking. There is no need to wait for days or weeks while price does minimal moves. A LTF trade is something within the ranges of a couple of percent to upwards of 10% depending on how volatile the market is that day. Take profits fast, set your stops tight and be on top of the trade is the name of the game here.
Perfect entries
Scalping on LTF can gift you an advantage of a perfect to a near perfect entry due to the constraints of the trade. This can be achieved with a tight stop that brings you out of a trade if it starts to invalidate your setup but on the other hand gives you a window of opportunity to obtain a really opportunistic entry. This is opposed to waiting for a daily confirmation (HTF) thus you would miss the upside potential a scalp trade on a LTF can provide. Some of the time a HTF trade wont even exist and this is why scalping has its place.
For example, A scalp/day trade on Ethereum 1-hour played out over one day.
A basic trendline break of downwards momentum. Entry on consolidation above trendline. Stop is a tight 1.4% which is back below recent low and trendline. R/R for first TP point is 2.85 and TP2 is 7.13.
As opposed to the 1-Day chart (HTF) where this trade does not exist at the time, no entry is granted, no clear resistance and this 10% on Ethereum is missed.
Advantages of Higher Time Frame Trading
Less time in front of the screen and controlling emotions
Swing trading on higher time frames can reward you in several ways. A frequently overlooked and underestimated advantage is that you generally will spend less time on the screen monitoring your trade and more time doing something else, whether it be with loved ones, perusing a hobby, exercising or even have your feet up on the couch relaxing.
Time is the most valuable asset we all share and being glued to the screen 24/7 scalp trading can be very detrimental to not only physical health but almost always more importantly mental health. No trade is worth skipping time with friends or loved ones or missing an important event.
The advantage here is that HTF trades are set and forget plans where you would ideally only check on maybe once a day. This keeps your emotions in check and allows you to look at things without noise.
For example, a simple break of resistance on Ethereum 1-Day here in early October played out over 17 days with a clear TP point and an invalidation loss of 4%. The plan is in motion, turn off the screen for the day. Trade executed with minimal effort and stress.
Better rewards
Choosing a winner can be hard. When you do and you’re subsequently swing trading or investing in that asset. It can pay off well in the cryptocurrency markets. Swing trades and investing can provide you with the biggest returns given that you take realized profit. Think simply swing or investing in Ethereum at the start of 2021 and playing it until certain key levels of market structure are broken. A gain of 10–15 times your investment would have been made simply by pressing the buy button and walking away from the computer. Minimal stress, minimal work all the returns.
Disadvantages of Lower Time Frame Trading
Emotionally draining
While this ties into the advantage of HTF trading and being away from the computer screen etc. The disadvantage of LTF scalping and day trading is much more nuance than having to be at a screen all day. Not only do you have to consistently keep watching the charts and your positions. It also is keeping you away from other things in life by being too invested in charts. This may heighten your emotion towards market moves that don’t go in your direction. Heightened emotions may affect your ability to trade with a clear and concise frame of mind. On top of that, for example, emotions could lead you to overtrade a long position that’s stuck in a clear downtrend on a HTF perspective.
Flipping bias also ties into the psychological factor of LTF trading. Spending your time looking at 1-hour charts of bitcoin in the past month would have sent you bullish to bearish and vice versa 10 times within a period of a day. Not only is this counterproductive to your outlook on the market and the influence it will have on your trades, but the psychological toll this takes by straining your mind is huge if left unchecked. Bias starts to creep its way in and influence your moods and relationships with your family and friends when things don’t go your way over the span of a few hours.
At the mercy of news and events
A LTF trader in positions will also suffer from the effect of positive/negative news or outside events effecting the price that will influence any current open trade. Although a plan for a trade is carefully executed at the right time, a market can turn instantly on a dime off of the back of some FA news about the asset, or a real world political motivated that effects the market as a whole. A LTF is at the mercy of these happening and should be taken into consideration if a trade does not go your way.
Disadvantages of Higher Time Frame Trading
Trading in smaller easier wins for longer informed guesses
While not nearly a disadvantage or advantage for either, a thing to consider when scalp or day trading a setup on LTF’ are levels of support and resistance. These are often clearer and more concise which helps planning the trade an often-easier experience compared to that of an HTF setup. This ultimately leaves the guess work out of thing. The point of a scalp trade is to be in and out with minimal drawdown and minimal profit over a smaller amount of time. Think of it as a compact trade.
In a sense there is less time to play with emotions of waiting longer for a return and or shifts in overall bigger market structure going against your trade. HTF trades have a bigger range of invalidation and swing potential.
Your portfolio and trade could have a wide invalidation level that plays out over a longer period of time that you were hoping for. It could be days or weeks being in the red with no end in sight after an entry while still technically being within the constraints of your plan for the trade. This can play on your emotions also, as it’s a prolonged period.
In a sense, you’re ‘guessing’ on a bigger return over a longer period than a more likely setup with a smaller percentage in a scalp or day trade.
For example, this HTF swing trade or investment on Ethereum 1-Week. An initial entry is taken at $1894 as it enters the buy zone (green box). The entire trade takes 105 days to which the first two months the trader goes into the red 9% two times but technically not invalidating the trade. To which it then goes to 100% after the elapsed time. This can also happen in take profit zones where your initial TP gets hit and the asset continues to run a certain percentage higher although in the zone you have marked.
Less precise entries lead to missed percentages
Bigger invalidation levels and wider entry zones can affect and eat into the profit of a move. This is off of the back of wider zones for entries and profit taking and the emotions that come with that as previously mentioned. Generally, when taking a swing trade or investing, for it to become a clear setup one might have to sacrifice the first few percentages of a move to confirm the setup.
For example, the Ethereum HTF swing trade on the 1-Day used previously. The first 17% of the move is missed to confirm the following 17%.
Summary and closing notes
Whatever timeframe you chose to execute your trade you should be cognizant of what that timeframe will reward you with given the trade setup. Both have their pros and cons and it’s not as simple as buying something, setting a stop and some take profit points.
Big picture understanding of what your trade entails, the length, the expected return, the time spent to monitor etc. can affect profit and be the difference between making a gain, or losing your bag.
Play around with what works better for you in your life situation and see what you can achieve on each timeframe. After a while you’ll find what best suits your trading style.
Happy trading from me and the team at Eight Global!
