Imagine this: you are a beginner, and you do not have that much budget for trading. You are scared of losses, but you want to try because you want to earn. So, you are thinking about trading on a 5-minute chart or less to scalp on a few profits. Yes, it is fewer pips, but it is also less risky. However, these very short time frames are challenging ones. A wise trader will not want to go to the live forex market with only a little knowledge about how things work.
Small time frames versus bigger time frames
If you have already built your trading system, it might be a better idea to use daily charts instead of the ones that last for only a few minutes, regardless if you are planning to trade them or not. The chances of profits are more with bigger time frames. Moreover, bigger time frames can build your confidence and skills that smaller ones cannot. Smaller charts create more noise.
Scalping and time frames
If you are an experienced system trader, you might be doubtful about people who are scalping. People who only have small accounts are the ones who usually trade small time frames because the risks are less. Scalpers open a position to get a few pips. However, if you are a retail trader, scalping might not be the best thing for you. It is challenging to execute and most retail traders who try it, especially beginners, fail. The ones that run the automated trading programs or algorithms are high-frequency trading firms. The algorithms are made by a knowledgeable group of people. So, if you trade and use shorter time frames, get ready to compete with them.
The bid-ask spread and time frames
In trading, you will most likely need a broker. Some will be transparent about how much they charge, while some will say they do not charge at all. Yes, they do not ask for a commission fee, but the truth is, they earn from the bid-ask spread. This term called bid-ask spread is the difference between how much the buyer pays and how much the seller receives at a given time. In a way, it is like a transaction cost. So, the broker will always sell at a higher ask price and always buy at a lower bid price. The bid or ask price that your broker gives you is also called quotes.
If your buy and order get executed at the quoted price, the cost you are paying is called the quoted spread. Furthermore, the transaction cost per trade is more or less half of that spread. So, if you are scalping, then the transaction cost in the spread and slippage might also be a problem. The transaction costs remain the same even when your profit is small. So, if you trade on a bigger time frame, it might be unnoticeable. But if you make multiple trades a day in smaller time frames, your profits will only go to the transaction fees. It is also possible that your transaction fees will even be more significant than your profits.
So, did you make up your mind?
Let us end by saying that thorough research and practice is a must before going into the live market. You must be ready. Do not depend on your trades in plain luck. Using shorter time frames may work for very few people, but it will be best to test your trading system on bigger time frames.
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