Time frames are needed to make sure technical analysis yields information that is relevant for you as a trader. Technical analysis is a great tool for predicting future market movements. For this reason both short-term and long-term traders use it. This should not confuse you. The reason one tool can generate useful predictions both for traders who plan to hold on to an asset for months and traders who only intend to hold on to an asset for at the most a few hours, is that time frames can be adjusted for each type of trader.
In technical analysis candlesticks are used to show market movements on price charts. Each candlestick displays price movements within a certain period of time. You can set this time frame yourself, thereby finding the information most relevant to you.
If you have a price chart with a time frame of five minutes, each candlestick on the chart shows 5 minutes of price movements. Such a chart with 50 five minute candlesticks would show you the last 250 minutes of market activity.
Were you to keep the chart the same, only changing the time frame to, say, four hours, each candlestick would illustrate four hours of price movements. Your 50 candlestick chart would in this instance show you the last 200 hours of market developments.
These price charts would look close to identical, but they would entail very different information. For this reason, you need to trade them in different ways.
For binary options traders, it is of crucial importance to understand the link between time frames on a time chart and the expiry time you should choose for binary options you invest in. For example, you will need to use very different expiry times for you binary options in order to trade the same event on a chart with a time frame of 5 minutes, and a chart with a 2 hour time frame.
Generally speaking, if you are investing in a boundary option or a touch option you want to find the longest possible expiration time as long as the target price is not unreasonable. This is because you will win the trade even if the market reached the target price only once before the option elapses. For this sort of option, it’s a case of the longer the expiry time, the better your chances of winning.
In the case of high/low options, the picture is not as clear. Should you opt to trade a longer time frame, let’s say an hour, with a short expiry time, a brief market movement can sabotage your trade before the market developed the predicted movement you made your investment based upon.
By trading a short time frame with a long expiry time, you risk that the movement you invested in will elapse before the option expires and you make any money.
Sad to say, we don’t have any set rules that tell us what sort of expiration time fits with what sort of time frame. It is mainly a question of what sort of strategy you use. For example, a strategy trading breakouts should have a shorter expiration time than a swing-trading strategy even within the same time frame. This is because trading breakouts requires shorter expiration times than trend-following strategies.
When attempting to assess which expiration time to choose for a trade, you ought to estimate how many periods will pass before the movement you want to invest in will develop. Then, you just multiply the amount of periods with the time frame you are operating with.
If, say, you are trading a breakout on a 20 minute time frame, and you estimate that an asset will breakout during the upcoming candlestick, you ought to set a 20 minute expiry time for the binary option you invest in.
Should you be trading swings and looking to trade a correction on a 10 minute time frame, you are well advised to consider the previous corrections that occurred in this trend. By doing this you will establish how long they took to develop.
If the corrections took between 10 and 15 candlesticks to occur, it makes sense to assume that the next correction will follow a similar pattern. If you are in doubt, you can use indicators like the bandwidth to confirm this assumption.
In an instance where the ongoing correction already has moved 4 candlesticks, you will know that you are likely to have between 6 and 11 periods remaining. If you multiply this value with 5 minutes per period, you get somewhere between 30 and 55 minutes. Hence, you ought to be looking for an option with an expiry time in the region of between half an hour and three quarters of an hour.