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