bisns05-24-2011, 07:50 PMIf
you ever look at a currency pair on different time frames, you probably
noticed that markets can move in different directions at the same time.
A moving average may rise on a weekly chart, giving a buy signal, but
fall on a daily chart, giving a sell signal. It may rally on an hourly
chart, telling us to go long, but sink on a 10 minute chart, telling us
to short. What the hell is going on?
Let’s play a quick game called “Long or Short”. The rules of the game
are easy. You look at a chart and you decide whether to go long or
short. Easy. Okay ready?
5 Minute Chart
Let’s a take a look at a EUR/USD 5-minute chart on 11/03/05 around 4 am
EST. Oooh it’s so nice. It’s trading above its 100 simple moving average
which is bullish and look! It just broke out and closed above it’s
previous resistance! Perfect time to go long right? I’ll take that as a
yes.
Oh! You are WRONG! Look what happens next! It’s goes up a little bit but then drops like rock. Oh too bad.
60 Minute Chart
Let’s look at the same exact chart on a higher time frame. It’s the same date, 11/03/05 and the same time, around 4 am EST.
Holy cow! The pair broke out of its down channel which is bullish. It’s
trading above its 100 simple moving average which is bullish. The last
candle broke and closed above its previous resistance which is bullish.
Looks like a bull, smells like a bull. Nothing but up from here right?
You say long.
OOOHHHHH! Zero for two! How do you like your steak cooked? Because from
the looks of this chart…the bull got slaughtered. The pair even dropped
back into its old down channel. Look at that last candle, it was
dropping so much, it couldn’t even stay inside my chart! Amazing!
4 Hour Chart
Okay, we’ve now moved up to an even higher time frame chart. A 4-hour
chart. It’s still the same date and time, just a higher time frame. If
you had looked at this chart first, would you still have been quick to
go long on either the 5-minute or 1-hour chart?
It’s currently trading in a down channel which is bearish. The pair is
hitting the upper trend line of the down channel which is extremely
bearish. Yes, it’s still trading above the 100 simple moving average
which would count as bullish, but that channel would still make me
cautious. Especially since it’s trading around the upper trend line.
Look what happens! Droppin’ like its hot! The pair stayed true to its channel. It hit the upper trend line and traveled down.
Daily Chart
For fun’s sake, let’s go up one more time frame to the daily chart.
Wow, will you look at that? The pair is trading in an obvious down
trend. It’s below its 100 simple moving average and its in a down
channel. On this chart, the trend direction is so obvious! Do you also
notice the last candle? It tested the upper trend line and reversed. Not
a very good bullish sign. Let’s look at what happens next.
Hallelujah! The downtrend continues!
So what's the point?
All of the charts were showing the same date and time. They were just
different time frames. Do you see now the importance of looking at
multiple time frames?
We used to just trade off 15-minute charts and that was it. We could
never understand why when everything looked good the market would
suddenly stall or reverse. It never crossed our minds to take a look at a
larger time frame to see what was happening. When the market did stall
or reverse on my 15-minute chart, it was often because it had hit
support or resistance on a larger time frame.
It took me a couple of hundred bucks to learn that the larger the time
frame, the more important support and resistance levels were. Trading
using multiple time frames has probably made us more money than any
other one thing alone. It will allow you to stay in a trade longer
because you’re able to identify where you are relative to the big
picture.
Most beginners look at only one time frame. They grab a single time
frame, apply their indicators and ignore other time frames. The problem
is that a new trend, coming from another time frame, often hurts traders
who don’t look at the big picture.
Take a broad look at what’s happening. Don’t try to get your face closer to the market, but push yourself further away.
Select your preferred time frame and then go up to the next higher time
frame. There you make a strategic decision to go long or short based on
the direction of the trend. You would then return to your preferred time
frame to make tactical decisions about where to enter and exit (place
stop and profit target). Adding the dimension of time to your analysis
gives you an edge over the other tunnel vision traders who trade off on
only one time frame.
There is obviously a limit to how many time frames you can study. You
don’t want a screen full of charts telling you different things. Use at
least two, but not more than three time frames because adding more will
just confuse the geewillikers out of you and you’ll suffer from analysis
paralysis and go crazy.
We like to use three time frames. The largest time frame we consider our
main trend, the next time frame down as my medium trend and the
smallest time frame as the short-term trend.
You can use any time frame you like as long as there is enough time
difference between them to see a difference in their movement. You might
use:
1 minute, 5 minute, and 30 minute
5 minute, 30 minute, and 4 hour
15 minute, 1 hour, and 4 hour
1 hour, 4 hour, and daily
4 hour, daily, and weekly and so on.
When you’re trying to decide how much time in between charts, just make
sure there is enough difference for the smaller time frame to move back
and forth without every move reflecting in the larger time frame. If the
time frames are too close, you won’t be able to tell the difference
which would be pretty useless.
you ever look at a currency pair on different time frames, you probably
noticed that markets can move in different directions at the same time.
A moving average may rise on a weekly chart, giving a buy signal, but
fall on a daily chart, giving a sell signal. It may rally on an hourly
chart, telling us to go long, but sink on a 10 minute chart, telling us
to short. What the hell is going on?
Let’s play a quick game called “Long or Short”. The rules of the game
are easy. You look at a chart and you decide whether to go long or
short. Easy. Okay ready?
5 Minute Chart
Let’s a take a look at a EUR/USD 5-minute chart on 11/03/05 around 4 am
EST. Oooh it’s so nice. It’s trading above its 100 simple moving average
which is bullish and look! It just broke out and closed above it’s
previous resistance! Perfect time to go long right? I’ll take that as a
yes.
Oh! You are WRONG! Look what happens next! It’s goes up a little bit but then drops like rock. Oh too bad.
60 Minute Chart
Let’s look at the same exact chart on a higher time frame. It’s the same date, 11/03/05 and the same time, around 4 am EST.
Holy cow! The pair broke out of its down channel which is bullish. It’s
trading above its 100 simple moving average which is bullish. The last
candle broke and closed above its previous resistance which is bullish.
Looks like a bull, smells like a bull. Nothing but up from here right?
You say long.
OOOHHHHH! Zero for two! How do you like your steak cooked? Because from
the looks of this chart…the bull got slaughtered. The pair even dropped
back into its old down channel. Look at that last candle, it was
dropping so much, it couldn’t even stay inside my chart! Amazing!
4 Hour Chart
Okay, we’ve now moved up to an even higher time frame chart. A 4-hour
chart. It’s still the same date and time, just a higher time frame. If
you had looked at this chart first, would you still have been quick to
go long on either the 5-minute or 1-hour chart?
It’s currently trading in a down channel which is bearish. The pair is
hitting the upper trend line of the down channel which is extremely
bearish. Yes, it’s still trading above the 100 simple moving average
which would count as bullish, but that channel would still make me
cautious. Especially since it’s trading around the upper trend line.
Look what happens! Droppin’ like its hot! The pair stayed true to its channel. It hit the upper trend line and traveled down.
Daily Chart
For fun’s sake, let’s go up one more time frame to the daily chart.
Wow, will you look at that? The pair is trading in an obvious down
trend. It’s below its 100 simple moving average and its in a down
channel. On this chart, the trend direction is so obvious! Do you also
notice the last candle? It tested the upper trend line and reversed. Not
a very good bullish sign. Let’s look at what happens next.
Hallelujah! The downtrend continues!
So what's the point?
All of the charts were showing the same date and time. They were just
different time frames. Do you see now the importance of looking at
multiple time frames?
We used to just trade off 15-minute charts and that was it. We could
never understand why when everything looked good the market would
suddenly stall or reverse. It never crossed our minds to take a look at a
larger time frame to see what was happening. When the market did stall
or reverse on my 15-minute chart, it was often because it had hit
support or resistance on a larger time frame.
It took me a couple of hundred bucks to learn that the larger the time
frame, the more important support and resistance levels were. Trading
using multiple time frames has probably made us more money than any
other one thing alone. It will allow you to stay in a trade longer
because you’re able to identify where you are relative to the big
picture.
Most beginners look at only one time frame. They grab a single time
frame, apply their indicators and ignore other time frames. The problem
is that a new trend, coming from another time frame, often hurts traders
who don’t look at the big picture.
Take a broad look at what’s happening. Don’t try to get your face closer to the market, but push yourself further away.
Select your preferred time frame and then go up to the next higher time
frame. There you make a strategic decision to go long or short based on
the direction of the trend. You would then return to your preferred time
frame to make tactical decisions about where to enter and exit (place
stop and profit target). Adding the dimension of time to your analysis
gives you an edge over the other tunnel vision traders who trade off on
only one time frame.
There is obviously a limit to how many time frames you can study. You
don’t want a screen full of charts telling you different things. Use at
least two, but not more than three time frames because adding more will
just confuse the geewillikers out of you and you’ll suffer from analysis
paralysis and go crazy.
We like to use three time frames. The largest time frame we consider our
main trend, the next time frame down as my medium trend and the
smallest time frame as the short-term trend.
You can use any time frame you like as long as there is enough time
difference between them to see a difference in their movement. You might
use:
1 minute, 5 minute, and 30 minute
5 minute, 30 minute, and 4 hour
15 minute, 1 hour, and 4 hour
1 hour, 4 hour, and daily
4 hour, daily, and weekly and so on.
When you’re trying to decide how much time in between charts, just make
sure there is enough difference for the smaller time frame to move back
and forth without every move reflecting in the larger time frame. If the
time frames are too close, you won’t be able to tell the difference
which would be pretty useless.
