The running of the bulls in equities (SPX) grabs headlines overnight with China up 2.5% leading the ...
How High Should You Look?
02/25/2014 9:00 am EST
Yohay Elam of ForexCrunch counsels forex traders to confirm the direction of a trend using a higher time frame prior to executing a trade.
You see a nice potential trade that perfectly fits your system. Before hitting the trade button, you want to perform another test: does the direction of the trade fit a longer-term trade?
And now the question is: how high should you look? Here are a few suggestions.
“Make the trend your friend” is a cliché you’ve heard many times in the past. Yet this cliché is true. In a perfect world, you would want all the charts to point in one direction: from a one-minute chart to a monthly chart.
Life and also forex trading aren’t perfect: you often have conflicting signals. This applies to fundamentals as well.
First of all, it’s better to start with a higher time frame. Are you basing your trades on a one-minute chart? Think again. This chart usually includes a high amount of “noise” that may be misleading.
A one-hour chart is better. Four-hour charts are popular as well, but also 15-minute and five-minute charts.
If you’re using a five-minute chart, please check the trend with at least a one-hour chart. The proportion is X12, but it’s important in this case.
If 15-minute charts are applied, please take a look at two-hour charts. The proportion here is X8.
For 30-minute charts and for one-hour charts, a comparison with four-hours charts is sufficient. The proportion is going down as time frames rise.
For two- and four-hour charts, eight-hour charts will be nice.
For eight-hour charts and higher, a comparison with the next level is nice to have, but you’re already on much more stable ground, so this is not a must—just a bonus.
As the time frames rise, not only do comparisons with higher time frames fall, but also the importance of fundamentals rise. Long-term moves are more dependent on majors shifts in economies, interest rates, and also politics.
Short-term moves can happen due to a random speculation by a random hedge fund.
By Yohay Elam, Founder, Writer, and Editor, ForexCrunch.com
Related Articles on FOREX
Bill Baruch, president and founder of Blue Line Futures, reviews and previews the euro, Japanese yen...
When bonds and stocks both rally along with commodities, markets have no fear. This was true for Eur...
Renowned investor and Columbus Business School Faculty member Jim Rogers has been cautioning investo...