- January 20, 2022
- Posted by: CoachShane
- Category: Trading Article
When the question of which time frame is good for day trading, a five minute trading chart is one of the more popular responses. Time based charts are just one method of charting price. You also have, for example, tick chart, renko and even Kase bars
We are going to stick to time based intervals for this article.
There is a big difference between using a longer time frame such as the daily chart, and these short term day trading style periods.
For example, if we compared a 5 minute chart to a daily chart, there are some stark differences as the five minute shows price details that the daily won’t show.
The daily candlestick chart essentially only had longs available until we hit highs. Once price started to pull back, we are looking at a bull flag. There was no sign of exhaustion that would have set up a potential short trade.
Looking at the five minute chart, we have trading opportunities in both directions during this pullback on the daily chart. There are more trading decisions to be made using the smaller time frame charts. There is also the opportunity to overtrade which can be a big problem for all traders.
Using a faster chart period such as the 1 minute or the 5 minute is going to depend on your trading style and the strategy you are using.
Keep in mind though, while time frames do not change the overall volatility of the instrument, the smaller time frame makes it more noticeable. Think of the 5 minute charts as using a x-ray on the forming daily candlestick to see what is making up how the candlestick is forming.
Benefits for 5 Minute Time Frame Chart Traders
As mentioned and shown in the example chart, this time period will give a trader plenty of opportunities during a trading day.
Disclosure: while hindsight, this chart was advanced candlestick by candlestick and decisions made with each advance.
Here is a breakdown of each section:
- Big move down after a gap up. Consolidation gave an entry for another move down
- The double bottom succeeds quite well using a trend line break entry
- Double bottom, rise in price, slight consolidation and breakout entry
- Bull flag after a strong run up in price
- Consolidation, breakout to the downside, consolidation after the breakout leading to an entry
- Gap down, fast move up, pullback and trend line break entry
- Double bottom with the second bottom formed with long lower shadows. Play break of those highs
- Strong move up and pullback using trend line break entry
Over the course of 3 days, traders would have had 8 opportunities to get a trade on using very simple technical analysis. With proper risk protocols, this is a good way to build a trading account depending on how you handle trade management and profit taking exits.
5 Minute Chart Entries For Reversals
Another great use of this time frame is using it to enter a trade on the basis of a longer time frame setup.
As a higher time frame chart may have an overall trend upwards, the lower time frames like the 15 minute and the 5 minute, can be trending downwards. We can look to trade the smaller time frame chart reversal back in the direction of the higher time frame chart.
One thing to be aware of is the the lower time frame can trend so much in the opposite direction, it breaks down the higher time frame chart. Essentially the trend on the lower time frame chart takes over.
With the higher time frame example on the left, we had what was essentially a bull flag in an uptrend. The uptrend being determined by higher highs and lows.
On the right, the lower time frame was putting in lower highs and lower lows. That is a price action descriptions of a downtrend.
The right side chart moved so much, it can force the higher time frame into a lower swing low. While not yet a downtrend on the higher time frame, it could turn into one if a lower high is put in.
Keep that in mind when we look to use the 5 minute chart as our trade entry chart. Your entry chart may “turn the trend”.
On the daily chart (D), while not a clean pattern, we essentially have a complex correction that took place.
- The day prior, we came into a support zone and the next day we would look for the five minute chart reversal at the open
- Price had gapped up on the day, pulled back and after filling the gap, put in a failure test of a previous low. That is a trade entry signal upon the break of the high of that candlestick
- If a trader were more conservative or just missed the first entry, a break of a trend line gives another entry
Your stop loss and your profit targets will be based on the trading time frame – the setup time frame. We are using the lower time frame for a better entry.
Drawbacks of 5 Minutes
The biggest drawback, for me, is your exposure to sudden price shocks in the market. We’ve all seen where prices make a huge price move in one direction and then reverses to the other.
Traders get stopped out with that activity. Given that there are more setups on these charts, traders can often be tempted to revenge trade and take a marginal setup.
The more trading decisions you have to make, the more likely it is you will make an error.
When we go even lower, a 1-minute for example, then were are in the territory of the high frequency trading algos. We can’t compete there.
Prices Can Move Fast At The Open
The strategy is to find the setup on a longer time frame chart and use the lower time frame for entry.
I personally use the daily chart for all my setups. I can come in after the market closes, scan through my list of stocks for setups that fit my plan.
Armed with a list of instruments for the next day, you can settle in with your setups already determined, and look for a trade entry trigger.
The trading activity at the open can be quite volatile and is the best time to enter a trade if using the lower time frame entry trick.
You don’t just jump into a trade, but wait for a trigger into the higher time frame pattern.
That approach may suit you as well.
Trading Strategies – 5 Minute Chart
If you look for a certain price pattern on a 15-minute chart, look for the same on the 5 minute.
A flag or triangle is a pattern regardless of what period you are looking at.
What about scalping?
Yes, you can scalp the 1 minute chart or any chart really, but that is a lot of time at your trading desk for little payoff (the majority of you). A scalp is just taking a little bit of a move and is not time frame dependent. “Scalp” is time in a trade.
Scalping is really just looking at small price targets and getting out as soon as price moves against you.
Let’s look at a simple trading strategy (simple, not easy) that is going to involve using a single chart.
- 8 and 21 EMA – you can use any combination of faster moving averages, there is no magic here
- 3/10 oscillator or any momentum indicator
What we will be looking at is a natural movement of the market.
- Price makes an impulse move in one direction
- Prices back off from the high (or low)
- We see another movement in the original direction
We will look for two different price patterns to form.
The impulse move (the first move up) has to show momentum. We will use the momentum indicator for that.
For long trades (shorts are reversed):
- Pullback – we look for a pullback without momentum OR a strong pullback that starts to form a trading range. If too much time passes in the range, skip the trade.
- Base at highs – Strong move up and price forms a consolidation type of pattern at the high of the move
For a broad strokes look at trend, we are considering the moving averages. You may also use those to have price pull back to them before looking for your trade entry.
Trade entry price, targets and stop loss
All traders will have different ways they enter and exit trades.
I will give you a standard technique but ensure you work out what is best for you.
- Entries – Break of a trend line or break of high or low of the past 1 or 2 candlesticks, strong close
- Protective stop – Place your stop at the extreme of the pattern you are entering on, average true range stop
- Targets – Previous swing highs or lows, multiples of your risk
This is a chart of Costco.
Price has moved up off the open and our momentum indicator has made a new high. We expect a simple pullback to form.
We see the pullback occur and either the break of the trendline or high of previous candlestick works for the entry.
Our stop loss will go at the low of the pattern we are entering on.
This is Snap and it is the other pattern you can look for.
Impulse move to the upside as shown by the momentum indicator, the large candlesticks, and even the separation of the moving averages.
Base forms at the high of the impulse move up. Traders trade the breakout of the pattern with the stop just below the extreme of the pattern.
An example to the downside where traders that use options, would buy a put position.
This is very clean price action and is the type of movement you may want to consider trading.
- Impulse move to the downside with indicator making a new low
- A rally back into the moving averages
- Short a breakdown of the trendline, the first black candlestick or any technique you prefer
When faced with a day as shown in the highlighted section, the mess of upper and lower shadows and sudden impulse bars in both directions, that is a sign to step aside.
It isn’t perfect.
There will be trades that don’t trigger. There will be trades that are losers.
This is the stock of United Airlines.
The first setup looked good. I didn’t label on purpose so you could think through what I was seeing.
Please take a moment thinking about that chart before continuing.
The setup on the left had nice momentum down as seen in both price and the indicator. Pullback was fairly strong and the sideways movement was a welcome sight.
We have an inside bar with the arrow. An inside bar is consolidation (better seen on a lower time frame) and playing a break of the high or low is essentially a breakout entry.
Brief downside move and then price rallied against you for a probable loss.
The upside momentum looked good and the indicator was rising.
Price pulled back and failed into a trading range.
The black arrow is a potential entry point and depending on how you place your stop, you were taken out.
A trader holding through a range like this is a glutton for punishment. Once new highs were failing, a quick exit is appropriate.
The five minute price chart does have some use as both a trading chart and an entry chart.
You will see some fast price action as well as whippy price moves. Those can be hard to trade.
In my opinion, only traders that are experienced and can stick to a trading plan should tackle this chart as a main trading time frame.
The trading strategy shown above can be expanded on but resist the temptation of adding more another technical indicator.
We are looking at momentum in one direction and looking to be involved in another leg in the same direction.
As for trade entries, I do use lower time frames like this but for entries only and am specific in my entry criteria.
Going forward, put together a watchlist of instruments and track some trades live. In time, you will see price action that suits your eye and that is what you should be focusing on. We all see things a little differently. You have to know yourself.