Time frames are a tool that can help you unlock the market’s secrets on multiple levels.
The issue with displaying market movements is that there are so many of them. Especially popular assets move up and down every second, which creates a wealth of information about what happened with the asset this day.
Most of this information is irrelevant to many trades. A trader that wants to buy a stock in preparation for retirement has no need to worry about whether an asset moved up or down over the last few seconds. They need a way to focus on the big picture, of aggregating all information in a way that provides them with all relevant information, but nothing more and nothing less. Similarly, a trader that wants to buy a stock for the next hour needs different information than a trader that wants to buy an asset for half a year.
To provide all types of trades with the information they need to trade well, technical analysts have developed a tool called candlesticks. Candlesticks are a way to display price movements in price charts, and candlesticks are the reason why you need to know about time frames.
Each candlestick summarizes market movements of a certain time period and displays them in one candlestick. The genius of candlesticks is that they manage to display all relevant information in only four prices: the opening and the closing price of each period, which are connected by a thick line, and the high and the low of each period, which are displayed as thin lines at the end of each candlestick. If the candlestick is white or green, the period featured rising prices; if the candlestick is black or red, the period featured falling prices.
With these four prices, you know everything about a time period that you have to know. You know the full trading range, you know every price within it, and you know how the opening and the closing price relate to the full trading range. Line charts, the type of charts most traders now from TV, only use one price per period to create their lines, which is why candlesticks provide you with a much more accurate understanding of what happened to the market.
Time frames define the length of the time period each candlestick summarizes. If you are trading a chart with a 5-minute time frame, for example, each candlestick represents 5 minutes of market movements. Therefore, a chart with 60 5-minute candlesticks displays the market movements of the last 300 minutes or the last 5 hours. A chart with a one-hour time frame, however, summarizes one hour of market movements per candlestick, and in a chart with 60 one-hour candlesticks, you see the market movements of four and a half days.
When you keep the exact same chart but change its time frame to 4-hours, each candlestick will represent the market movements of 4 hours. Therefore, the entire 60-candlestick chart now displays the market movements of the last 240 hours or the last 10 days.
The genius part of candlesticks is that they allow you to zoom in and out on market movements without losing a single movement. You always get all the information, but it is presented in the most effective way, which helps you to make the best decision.
Because of the different time frames, candlestick charts often look very similar, even though they display very different price movements and very different period of time. Therefore, you should trade them differently.