Do You Know What Time It Is?
Do You Know What Time It Is?
This week I am going to show you a little bit about trend following and what time frame chart you should think about watching. There are several things that should go into your decision of what time frame chart to watch, not the least significant is how often do you want to trade. The general rule of thumb is the more active you want to be, the shorter time frame you will watch. A trader who stares at a 60-minute chart all day looking to place a trade will very often get one or two decent opportunities. A trader who watches a 5-minute chart will have many more chances to trade. The main difference is that with larger time frames, you will generally have larger stop losses and larger profit targets. "Which trader will make more money at the end of the year?" is a question we get in class all the time! The answer? It depends on many factors including risk management, exiting techniques, etc. There isn't a firm rule for this, other than smaller time frames will give you more opportunities.
Another factor that will go into your choice of time frames is your discipline. This is one of the most important factors in becoming a successful trader! I did a Google search for "trader discipline" and over 2,500,000 results were found. Apparently, I'm not the only one who thinks this is an interesting topic! If you plan on trading just a couple of times a week, perhaps watching a four hour chart, does it help you to watch a 5-minute chart while you are in a trade? My response would be absolutely not, unless you are highly disciplined. Today in the Boston, Massachusetts Online Trading Academy office, I met a lady who was somewhat new to trading. She was trading from a larger time frame (like a four hour), yet would watch her trade on a smaller time frame (like a 5-minute). Any small move against her position on that 5-minute chart made her very nervous, so nervous that she occasionally would exit her trade on her own without waiting for the trade to get to her stop loss or profit target. Is that adhering to your trading plan? No it is not. The point is this: If you are disciplined, you have my permission to watch your trades on the smaller time frames. Let your trade plan work for you! If you are not disciplined, you do NOT have my permission to watch your trades on the smaller time frames, as you may be tempted to exit prematurely.
In the Spot Forex market, many traders are using the 1 hour (60-minute) chart to trade from. My personal belief is that using just one time frame chart is a 90 percenter mistake. (What is a 90 percenter? Since it is commonly believed that 90 percent of traders lose money to the 10 percent that make money, mistakes that are done by them are 90 percenter mistakes. See how easy this is? You can read more about this in my previous article entitled, A 90 Percenter Mistake.) When using just one time frame to trade from, these 90 percenters will very often buy into a bigger time frame's supply zone, or sell into a bigger time frame's demand zone. The way I personally see the market is this: The bigger the time frame, the bigger the money. While looking back in time to see significant supply and demand zones on just one time frame is fine for the experienced trader, very often seeing the bigger picture on a larger time frame can give us clues to market turns by looking for reversal patterns and /or candlesticks.
When you consider that the Forex market is used by HUGE multi-national banks, manufacturers, etc, to hedge their currency risk, you must be aware that they aren't trading for 20 pips in 20 minutes. They don't care about that! They are more concerned with 100's or 1,000's of pips over weeks, months, and quarters. This market is terrific for longer term trends lasting many weeks! So the point is this: Don't buy into a zone that they are looking to sell, and don't sell into a zone that they are looking to buy. Pay attention to the signals that these giant traders and investors are giving us by their footprints on the charts. In class we call looking at different chart times "multiple time frame analysis."
Very often a trader will use a smaller time frame to trend trade between larger time frame supply and demand zones.
In the following picture, the trader would have used the 240-minute chart for the significant supply and demand zones, with the 15-minute chart on the right for the trend between them. The blue arrows correspond to a long entry, and the red arrows correspond to the long exit.
Always pay attention to what the bigger traders are telling you and your path to low risk, high reward trades will be easier!
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