How To Use The Daily Timeframe In Your Forex Trading
The daily timeframe is an incredibly useful tool for day traders, scalpers and swing traders alike but it’s often misused in trading.
The correct use of the daily time frame charts can provide a great insight and really strong trading results for traders, allowing traders to capitalize on long term price movements.
In this article we’ll look at why the daily timeframe should be a staple in your trading, how to use it effectively and show some example trades to consider. So, let’s get into it…
Using The Daily Timeframe In Your Trading Analysis
The daily time frame shows 5 candles per week, showing all daily price action within just the one candle. If read correctly, this provides a huge amount of insight into where the market is potentially heading, areas of resistance and helps traders create a bias around their trading decisions.
Many successful funded traders will use the daily timeframe to provide a ‘higher time frame analysis’ of the market – allowing them to make better decisions on the lower time frames.
With that said, the daily time frame chart alone isn’t enough – the edge only really comes when traders combine multiple confluences to create a high probability trading system, as we will discover in the examples below. This is how many of our traders are able to pass prop firms challenges!
The Benefit Of The Daily Timeframe
There is a reason that most of our prop firm funded traders use the higher time frames for analysis… Because it works!
The main benefit is simple. The lower time frames are choppy. They have a huge amount of ‘noise’ associated with them, which makes it incredibly challenging to find a bias.
Two traders with the exact same skill set can look at any currency pair on the lower time frames and one trader will go long, one trader will go short. Neither trader is wrong in their approach but the point is that this can be incredibly confusing for traders looking to become profitable.
By giving yourself a fixed bias on the daily time frame, you’re filtering out the noise on the lower time frames and only looking to trade in one direction. This is much easier to succeed with, we believe! Therefore, we highly recommend including this in your trading plan!
Even our Lux Trading Firm funded traders using the ICT concepts do still include daily bias and candles within their trading strategies.
The Drawback Of The Daily Timeframe
Although using the higher time frames is great – it’s not bulletproof and you still need to be aware of the downsides.
Firstly, like any technical analysis, the daily time frame is not always right. Sometimes price will move straight through resistance areas, support areas and not respect any of your analysis – this does happen. To mitigate this risk, use economic data and fundamental analysis to strengthen your hypothesis.
Secondly, due to how long it takes to form setups on the daily time frame, using this in your analysis can sometimes leave you without a trade to take for a while. This isn’t a problem if you’re a patient and profitable trader. However, most traders will start to crumble under stress if they do not have a daily flow of trades to take.
Trade Example – EURUSD
Here, we are looking at EURUSD on the 1D timeframe. As indicated by the vertical line, the price stalls after a long bearish trend and starts to slowly retrace, forming a bullish trend. New higher lows and higher highs are created – potentially leading traders to assuming that a bullish position is the best port of call.
Price retraces back to the 200 EMA after creating a new higher high. As price starts to reject the EMA on the 1D timeframe, our bias should be to look for long positions on the lower time frames.
At this point, we can drop to the 1H timeframe and see how the long bias is unfolding. Firstly, we have a key support turned resistance level to consider, highlighted with the gray rectangle. Secondly, we have the break of a 1H trendline, indicating that the trend on the 1H may in fact be changing to bullish, following the bearish run.
A sensible entry here, providing the higher time frame still made sense, would be to enter with a large stop loss on the trendline break. The larger stop loss allows for a retest of the lows, or the trendline.
Another possible entry would have been on the break of the large resistance area – which could have been done with the use of a pending market order.
Whichever entry you took, you have used the daily time frame to build your bias, then the lower time frames to execute your trade – resulting in a healthy risk to reward ratio.
Trade Example – AUDUSD
On AUDUSD, we were seeing price extremely bullish, moving into a potential area of resistance on the daily time frame. Most traders solely looking at the lower time frames would have expected the price to continue to rally based on the price action. However, by looking at the 1D, it was clear to see that we may face some selling pressure.
Now our daily bias is a sell, we can look at the price action on the lower time frames and see what the market is telling us.
We had a trendline break to the downside, indicating that the trend may be shifting, as per our analysis. We also had a retest of the trendline, then a break below a key support level on the H1 timeframe.
This move alone presented 3 very simple entries into the short position.
- Break of trendline.
- Retest of trendline.
- Break of support level.
Any one of these entries would have yielded you a great risk to reward trade, with very little drawdown!
In Summary – How To Use The Daily Timeframe In Forex Trading
In conclusion, utilizing the daily time frame in your trading can be hugely beneficial if you’re looking to increase your win rate and reduce the levels of ‘noise’ in the markets. Having a fixed bias allows traders to approach the choppy lower time frames with complete clarity and often yield better results!
If you’re looking to become a prop firm funded trader, work with Lux Trading Firm today!
