The Forex market, like all markets, are fractal. This is a fancy term that means what plays out on a daily or weekly chart in terms of price action patterns can also play out in a 5-minute or 15-minute chart as well.
The beauty of this notion is that once you determine your edge as discussed in this 4-part series, on developing your FX Trading Strategy, you only need to determine the time frame that suits you best.
Finding The Time Frame That Suits You Best
The FX market often attracts short-term traders so that they can have immediate gratification on their trades and / or avoid the fear holding risk-overnight.
However, I talk to hundreds of traders a month who are swing traders and have talked to other traders who will hold trades for months or years if the technical edge remains in their favor. But let's break down why traders like yourself will choose which time frame to focus your trading strategy on.
Day Trading / Short-Term
FX traders who are looking to be day traders hope to trade their edge by identifying and trading in the direction of the intra day trade without holding risk overnight. The FX market is open 24-hours with three main sessions around the Asian, London, & American markets allowing trader's from all over the world to identify and trade their preferred intra-day pattern. The London session is easily seen as the most exciting session to trade because the largest percentile moves on the day often take place during the London session, unless a major news event like FOMC but the this volatility is not without risk.
If you were to walk on a bank's trading desk, you would see that many of their trading models equate volatility with risk. According to this definition of risk, the London session is the riskiest market to day trade because the high levels of volatility can cause one trade to escape from you. DailyFX, a leading news and analysis site that I write and do webinars for, found from over 12M live trades within one year, that short-term traders were most successful trading the tight ranges of Asia and least successful trading the wide ranges of London.
If you're interested in Finding The Intraday Opportunities within sessions, here are the hours in EST:
Tokyo opens at 7:00 pm to 4:00 am EST
London opens at 3:00 am to 12:00 noon EST
New York opens at 8:00 am to 5:00 pm EST
Multi-Day / Swing
Swing trading has become very popular as it encapsulates a holding time of 2 days to a few weeks. Of the three styles, this is the trading time frame that I've had most success with and I feel helps to limit risk while taking advantage of underlying factors and big swings in price that can last 1-2 weeks. Forex traders who focus on swing trading opportunities will often place stops or manage risk by exiting a trade should a major level of support or resistance break that goes against the major trend their trading. In terms of taking profits, FX traders look at longer-term pivot points or a multiple of the average true range such as 2.5X the ATR. As with all trading strategies, managing risk is critical.
Long-Term / Position Trader
It's necessary to say upfront that being a position trader requires relatively small positions in relation to your trading capital or rather deep pockets. Similar to the profit targets of swing traders, position traders need to have a rather loose stop to allow their trading strategy to work out. Loose stops are often a major moving average like a 100 or 200 day moving average. Another common method is 2.5X - 3X the average true range. The logic behind this wide stop is that if you're looking to capture a 750+pip move, you want to make sure you're only exiting the trade if the environment has fundamentally shifted which would take you out of your trade.
There's Something For Everyone
Regardless of your trading strategy, take heart. There is a time frame that can and will work for everyone as long as you've identified your edge objectively and continue to manage your risk. Lastly, it's important to understand that there is no best way to trade but rather a best way for you to trade based on your personality because if you want quick action, day-trading will suit you better than being a position trader and vice-versa.