In technical analysis, you are trying to use price action and the indicators to analyze what price has done in the past, what it is currently doing and what it is most likely to do next so as to take advantage of it. In this analysis, you need the most refined data for a better analysis. Data from the lower timeframes are more likely to contain outliers when compared to the higher timeframes. There are several reasons why the higher timeframes are more reliable than the lower timeframes in technical analysis. Some of the reasons are discussed below.
More Volume in Daily Time Frames than Lower Time Frames
The volume of transactions taking place in higher timeframes is more than in the lower time frames. For example, in the daily timeframe, each price bar represents all the transactions that took place in all the trading sessions in a 24-hour period. Compare this with a five-minute bar that represents only the transactions within that five minute — a time that may not be enough for ‘one’ high-volume trader to load his orders in the market. This shows that institutional players are trading on the higher time frames than the lower time frames.
There is less noise in the Higher Time Frames
The higher the time frame, the less the noise. What appears to be a trend in the 15-minute chart may be a pullback in a one-hour chart and a pause in a four-hour chart. Lower timeframes can make you go against the predominant market trend and, you may not like what will happen next. Take a look at the lower time frames and you will soon notice that the price line is much more jagged than the higher time frames.
Take a Step Back and Look at the Bigger Picture. The Trend is Clearer.
You will have a better view of the predominant trend in the higher timeframe. You will appreciate the price movement better and can easily attach better trend lines. This will minimize your chances of going against the trend. The price levels respected in higher time frames are more important than those in the lower time frames. What appears to be a range market in a five-minute chart with visible support and resistant level, may just be a single bar in a four-hour chart with the so-called support and resistant levels being the high and low of the four-hour price bar.
You will get a broader perspective of the market
With the high timeframes, you can see the bigger picture of the market situation because you will see the price activity of a greater length of time on the same screen page. While a daily chart can show the price action of the preceding six to twelve months, a 15-minute chart will not even show you that of a complete month no matter how you zoom out.
Analyzing the lower time frames alone is like having a tunnel vision which as you know, is prone to many accidents. Having a broader perspective of the market will help you screen out ‘false setups’ you would have taken if you were analyzing the lower timeframes alone.
More powerful signals/setups occur in the higher time frames
You will get more accurate, stronger, and powerful setups. The higher timeframes have bigger price waves and so you have larger profit targets. On the average, each impulse wave in a four-hour chart may be about 80 pips or more depending on the currency pair and its volatility.
Even when you wish to go against the trend and trade the corrective waves, you are more likely to capture some reasonable pips than trading the lower timeframes. For example, impulse waves in a five-minute chart may be about 10 to 15 pips, while corrective waves in a four-hour chart may be about 40 pips or more, giving you some chance to lock in a few pips.
Less Time Needed to Monitor the Market = Less Stress
You do your analysis less frequently as time moves much slower. If you analyze the daily chart, one bar equals to one whole day. This is unlike the lower timeframes analysis where you may have to be checking your screen more often as the market dynamics can change very fast with several price bars printed before you can even finish a cup of coffee. If you analyze the 5 minute chart, you gotta be watching the chart every 5 minutes.
Because the higher time frames take less time to analyze, you can analyze and trade many currency pairs at the same time. Besides, you are less likely to make mistakes and even if you do, you will still have a chance of correcting them in time.
Fewer Trade Setups Means that You Will Be More Selective Automatically
Because you don’t get too many setups, you’re forced to patiently wait for setups. The less number of setups you get, the less number of trades you can take and the less likely you will overtrade. Overtrading along with having a tunnel vision of the market is the demon of trading lower timeframes.
In conclusion, irrespective of your trading style, it pays to have a broader picture of the market. Analyzing the higher timeframes is one thing you may want to add to your trading routines to boost your odds of success.
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