We have covered a number of indicators so far which help predict the movement of the markets.  However if you have been following our lessons with a MT4 platform with a demo account, you will have noticed that the indicators show different readings depending on which timeframe you are looking at.  For example the RSI can read oversold on the 4hr chart but undersold on the 1day chart.  The reason for this is that the Metatrader platform uses the currently viewed chart timeframe as the period for its calculations rather than a set timeframe.  For example, we mentioned with the MACD indicator, we use a 12 day and 26 day EMA for our calculations; on our Metatrader platform this is only true if we are viewing the 1day chart.  If however we are viewing the 4hr chart, MT4 uses 12 4hr periods and 26 4hr periods for its EMA calculation.

When trading knowing the timeframe you use is relevant to the trading style you use.  You shouldn’t use indicators on a 1hr chart if you plan to make a long term trade or inversely indicators on a weekly chart to place a trade you hope to exit in the next few hours.

Another thing to bear in mind when using indicators that use past price for their calculations is that they use past prices in order to gauge market sentiment and understand its behaviour.  However at timescales below the 1hr chart, unless a major relevant news story has broken, all you are seeing on the charts is trading “noise” and very little usable information will show through on indicators.  As a result, traders who use technical analysis to inform their trades tend to stay with timeframes of 4hrs or above.  There are those however that use the trading noise to their advantage by making high leveraged, quick trades entering and exiting in seconds or minutes without any kind of informed prediction as to where the market is going.  This method is called “scalping”.  Scalpers hope to make only a few pips on each trade with high leverage.  The problem is that if the market doesn’t move in their favour it can quickly lead to huge losses due to the high leverage and easily wipe out the traders without a risk management strategy.

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