While there are an unlimited amount of ways to trade the financial markets, one of the biggest issues that I see with new traders is that they do not look at multiple time frames. Throughout the FX forums you can see a lot of traders talking about their favorite timeframe, and while that is fine, markets do not operate in some type of vacuum. In other words, if you trade the 15 minute chart, you can’t ignore other time frames. One of the most important things to understand is whether or not you are on the right side of the market.
The importance of multiple time frames
I cannot emphasize the importance of multiple time frames and paying attention to higher time frames. While you may not be putting on a position on the weekly chart, understanding with the weekly trend is can keep you on the right side of the market. Far too many people will talk about a currency pair something like this: “We are in a weekly downtrend, but the daily uptrend is somewhat choppy. Beyond that, the four hour chart is flat, but the hourly chart is turning up.” At the end of the day, the most important line in that statement is “We are in a weekly downtrend.” All of the other moves don’t matter in the long term unless they line up with the trend.
One of the biggest things that people don’t understand is that when you were buying or selling a currency or commodity, it’s just like anything else. For example, you would not go to the store and start buying a television that has been marked up 15% and less of course you absolutely had to. However, if there is a sale going on and that same television is 10% off, you might be tempted to get involved as it represents value. Far too many traders don’t realize that you are simply participating in price discovery and what is essentially an option process. Futures traders understand this, but Forex traders unfortunately don’t.
The trend is your friend
I know it’s cliché, but the trend in fact is your friend. It allows you to be in line with large money, and this is especially true as quite often trends will last a couple of years in the Forex markets. This doesn’t mean that you can’t have the occasional pullback, it’s just that the market tends to move in that direction over the longer-term. Take a look at this chart below, and think about which direction you would rather be trading in:It’s pretty obvious that the market has been in an uptrend for some time. That doesn’t mean that we haven’t pulled back, but the US dollar has pounded the Turkish lira for quite a while. There are whole slew of reasons why that’s been the case, but at the end of the day what matters is that the chart is going from the lower left to the upper right. Not only that, the market has been extraordinarily bullish. If you try to short this pair in general, you probably have lost money.
Now take a look at the daily chart. You can see that I have a double bottom marked by a couple of yellow rectangles, so the question is this: “Is it easier and more comfortable to buy this market as it has been in such a long-term uptrend after seeing a pattern like that, or not?” Obviously, it is and as we pulled back from such a significant move to the upside, most people will have felt that the US dollar was relatively cheap against the Turkish lira. There was the initial move lower, but why would you try to fight the market?Drilling down a bit, you then have the four hour chart. On the attached four hour chart you can see that there was a spike higher, and then a significant selloff. There would be retail traders pushing the market lower, and perhaps algorithm and automated trades doing the same, but at the end of the day you can see that the support held again. Because of this, even those who got a bad fill towards the top of the spike still had plenty of buyers underneath to help support them. You cannot say the same thing about the sellers as we approach that level already. In other words, there are other people there to support you in your trading decisions. This is essentially what portfolio trading is all about, going with the trend and keeping your position size reasonable. While you don’t necessarily have to try to portfolio, there is a reason why people “buy-and-hold” a financial instrument that has been performing well.Going down even lower, I have the hourly chart. You can see several instances where we fell, but buyers came back into supporting the market again. It’s more of the same, value hunters coming in to pick up the market.
The main lesson
The main lesson is simply sticking with what the longer-term traders are doing. They are the larger money players in the market and determine where it goes over the longer-term. At this point, you can take a look at the charts all in a bullish attitude from this example, and then simply look for pullbacks that line up with little bits and pieces of support on the longer-term charts. That’s the simplest way to trade markets, and one of the most profitable.
Remember, you should always be looking for value in whatever asset you want to own. In this case it was the US dollar. It doesn’t really matter though; we could go back to our example with the television and whether it’s on sale or has gone up in price. It’s the exact same process over the longer-term. The easiest way to do that is to simply make sure that the timeframe that you choose to trade on is in line with the longer-term trend. For myself, I use the weekly chart as definition to the longer-term trend.