Over this series of articles, we will walk traders through the multiple-step process of building a trading strategy. The first installment in the series discussed market conditions. This is the second entry, in which we will delve deeper into selecting a time frame for the strategy.
But we can still choose time frames conducive to our goals, and build an analytical approach so that we know the optimal time to employ our strategy and enter trades based on what it is that we want to get out of the market.
Often times, traders can get conflicting views of a currency pair by examining different time frames. While the daily might be showing an up-trend, the hourly can be showing a down-trend. But which way should we trade it? In many cases, traders can benefit from using multiple time frames; in an effort to incorporate as much information as possible into their analysis.
This leads into a very popular permutation of technical analysis in which traders incorporate multiple time frames into their approach. By utilizing multiple time frames in their analysis, traders are getting multiple vantage points into the currency pair s that they are looking to trade.
A common way of employing multiple time frame analysis is to use a longer-term chart to analyze the trend or general sentiment in the pair, and the shorter-term chart to enter into the trade. After the trader has determined the trend, and in the above chart — the trend is decidedly to the down-side this is determined from the successive lower-lows and lower-highs , the shorter term chart can be investigated so that the trader can look for an opportunity to enter.
In this case, the trader would be looking to sell as the Daily chart exhibited a strong down-trend. After dialing in on the 4-hour chart, the trader would notice that a portion of the downtrend had been recently given back as price went up.
Traders can look at this as an opportunity to sell the strong trend seen on the Daily, at a relatively high price as evidenced on the 4-hour chart. Which Time Frames Work Best with each other? Each daily candle has approximately one-minute candles, so when I look at the one-minute chart — I am often only seeing what would constitute, at max, one candle on the daily chart. It would be haphazard to read trends on the daily and attempt to place trades on the one-minute chart due to this disconnect.
We suggest a ratio of 1: So, if a trader is looking to enter on the hourly chart, the 4-hour chart can be used for grading the trend. If a trader wanted to enter on the 15 minute chart, the hourly chart can be used for reading sentiment.
Below is a table with some common time frames for analysis. From the table above, we can see that traders wanting to enter trades on the hourly chart can properly employ multiple time frame analysis by using the 4 hour chart to analyze trends. So, the first step for the trader is they want to identify the trends; and once again, for the trader using the hourly chart to enter trades the 4 hour chart can provide trend analysis.
Our trader pulls up a 4 hour chart and notices that price is, and has been below the period Simple Moving Average; so our trader would only want to be looking at sell opportunities at least until price went above the on the hourly, in which they would begin looking for long positions.
After the trader gets comfortable with trend analysis on the 4 hour chart, they can go down to the hourly to begin looking for trade entries. And because the trend was down on the 4 hour chart, our trader is only looking at potential sell positions.
In the chart above, you can see the numerous opportunities that our trader would have had to sell the currency pair based on stochastics. Surely, not every sell position would have worked out profitably for the trader; but that is an impossible goal, as completely avoiding losses is inconceivable.
Sentiment Analysis for Forex 60 of How to Build a Strategy, Part 1: Trading Psychological Whole Numbers. Attacking News Events with Price Action. How to Trade Panic. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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