The Usefulness Of Charts When Trading Forex

By: James Woolley

The short term 1 minute and 5 minute charts appeal to a lot of traders because by using technical analysis you can identify and trade lots of positions. However, they are often the downfall of so many traders. So why are these shorter term charts so difficult to make profits from?

Well one obvious problem you can identify straight away is covering the spread. With the spread on many pairs being 3 or 4 points, for instance (depending on your broker), it can be difficult just to break even.

Also because you are trading these short term charts, the movements and waves you will get from each move will be relatively small in a lot of cases. Even if you have an excellent trading system, sometimes a move may only last 5-10 points before reversing, so you therefore need a very high win ratio to make any decent money, taking into account the spread.

Another problem about trading over such a short time frame is that a lot of forex brokers frown upon this style of trading where you enter and exit positions in a matter of minutes. As a result they will either put you on manual execution, or will simply ban you altogether.

In my opinion you're much better off focusing your efforts on finding a winning longer term strategy. This way you will have more time to identify and monitor your positions and you will potentially net a lot more points from each move because the moves will generally be a lot bigger over a longer time frame. There's also the fact that this style of trading is generally a lot less stressful as you have more time to think and won't stress out over requotes and your broker being temporarily offline for a few minutes, which is not uncommon.

There are of course people who no doubt make decent returns from trading over short time frames, and make full use of 1 minute and 5 minute charts, but they are definitely in the minority. Most traders who scalp the markets will generally end up losing money in the long run.

So overall my personal opinion is that a trading system that is based on the longer term charts (from 1 hour upwards) will usually be more profitable in the long run than those based on 1 minute charts and 5 minute charts. You may make fewer trades this way, but the win ratio will often be a lot higher and you can potentially make a lot more points profit this way.

Foreign Exchange
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