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The Importance of Knowing Your Time Frame
06/05/2013 9:00 am EST
Veteran currency trader Marc Principato of SMB University Forex Training Program details when the best time to utilize the smaller time frame to refine your entry on a trade that offers a larger potential price move.
One of the more common mistakes I see new traders make is executing a trade idea that came from a larger time frame analysis, but justifying the entry from a set-up appearing on a smaller time frame and expecting it to reach the greater target. It can be very confusing because the smaller time frame charts can offer refined entries at times and offer better reward to risk for a trade idea that is unfolding on a larger time frame. So how do you know when to utilize the smaller time frame when trying to position yourself for the broader move?
First, when conducting multiple time frame analysis, it is important to look for relevant price structure or other forms of technical validation within its respective time frame. For example, if you are watching a resistance area on a one-hour chart because you are preparing for a swing trade short, then you cannot validate that idea until the one-hour chart is showing the appropriate signs. So this means the one-hour chart must present a price structure like a double top or failed high. Keep in mind, by the time all of this is in place, you will not be getting the best price. If you validate the trade properly, you will not need the best price anyway since the probability of the trade going your way is greater in this scenario.
A common mistake I would make in my own trading would be to always try and get the “best price." This means as close to the top or bottom of the move as possible. I learned the hard way that getting the best price without waiting for the market forces to line up in your favor is no better than gambling. And much of the time, it would lead to a string of unnecessary losses before getting into the trade that works.
So when is the best time to utilize the smaller time frame to refine your entry on a trade that offers a larger potential price move? After the larger time frame has presented the appropriate price structure. For example, let’s say you are looking for a long near a major support area for a swing trade. Price has been in the area for many hours and is finally showing what appears to be a retest of the previous low (double bottom). As the price is testing this level, now is the time to watch the 5- or 15-minute chart. What are you looking for? A similar price structure that supports your argument for entry: a smaller double bottom or higher low, etc. By only using the smaller time frame in this situation, you are aligning yourself with the bigger picture and can look for the greater potential trade while restricting your risk to the volatility on the smaller time frame.
Learning how to compare and utilize the information offered by multiple time frames is not easy. Often, newer traders do not have the ability to analyze properly or the patience to wait for a high quality trading scenario. This is why newer traders tend to trade more and perform less. The professionals that I know at SMB utilize checklists that help them weigh the all the market information in a step-by-step format. This kind of structure allows our traders to recognize and wait for the higher quality trading scenarios.
By Marc Principato, CMT, Director, SMB University Forex Training Program
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