It’s easy to look at charts from time to time and feel completely lost. This is especially true with day trading. Your typical day trader will usually spend long hours in front of his trading platform on most days. When you stare at chart for too long, fatigue can set in and cause you to make some foolish decisions. At times, the whole thing looks like pure chicken scratch and it really is rather hard to figure out which way is up, or down. Not to worry though! There’s a little trick out there used by many professional traders which may help with solving this problem.
Multiple time frame charting simply means using more than one chart at different time frame settings. In other words, if you trade the GBP/USD pair – there would be two or three charts open for that pair. Assuming you’re a day trader, the time frames might a 5 minute chart, a 30 minute chart, and a daily chart. Your daily chart would used to gauge an overall market sentiment. The 30 minute chart would act as the intermediary, and the 5 minute chart would be used for triggering signals to enter trades.
Let’s take a look at an example. You sit down in front of your computer for the European session. You first look at the daily chart to gauge an overall market sentiment. If the dailies have been climbing higher for the last week, or so, then we’re only interested in buying. The long term sets the tone for us, in terms of whether the bulls or the bears are in charge. If it’s a clear up trend on the daily chart, then we’re only looking to go long. No sense in fighting the trend.
Next, take a gander over at the 30 minute chart for a closer look at the action. If our daily is up, then we want to see some proof on our intermediary chart that prices are looking favorable for an upswing. We would also try to spot some price patterns indicating signs of bullishness, as well. This could be a great way to get into trades prior to the rest of the herd. Obviously, if the dailies were looking short, we would simply look for hints of downtrend action on our intermediary chart.
Lastly, and once having confirmed that our daily chart and 30 minute chart agree on price direction, we look to the 5 minute chart. The 5 minute chart allows us to really hone in on price action. It allows the trader more flexibility in helping him/her nail that precise entry. A tighter (and cleaner) entry order allows us to use tighter stops, and ultimately minimize our losses; a key component of profitable trading.
It takes a bit of practice to get comfortable with trading off of three different time frames, but the rewards are well worth the effort. There is an old adage in the markets that says, “Bulls make money, and bears make money, but hogs get slaughtered.” The quickest way to become a hog is by not observing the entire picture. Once you see the “big picture,” you will be able to pass on a lot of trades you may have otherwise taken without looking at the other time frames first. Practice this concept on a demo for a few weeks and see if it makes a difference. I think you’ll be pleased at how well this simple technique actually works. No wonder the pros have been doing it this way for so long.
Go to http://www.surefire-forex-trading.info to learn how successful traders make their money.
Olliver Kennedy is a successful real estate investor, trader, and entrepreneur. Go to http://www.surefire-forex-trading.info to get all the goods on forex trading!