Creating High Probability Trading Strategies Using Multiple Time Frames
High probability trading strategies using multiple time frames greatly increase the chances of the forex trader being able to identify price trends that may signal entry or exit points for successful trades. By looking at multiple time frames, traders can identify trends, determine support and resistance levels and find entry points as well as stop levels. Although the trader can monitor as many time frames as he wishes, in general, the most successful strategies involve using three time frames in the long, short and medium-term frequencies to analyze a currency pair.
In choosing the three time frames, start by determining the medium-term frequency based on your trading style, whether you are a long-term or day trader. Then compute a short-term time frame that is one-fourth the medium-term one, and a long-term that is four times the intermediate one. Thus, if your medium-term frequency is four days, the short-term should be one day and the long-term sixteen days.
The first step in developing high probability trading strategies using multiple time frames is to chart currency pair prices using a long-term time frame in order to establish a dominant price trend. When making trades using longer-term time frames such as months, weeks or even days, the trader should pay attention to fundamentals such as economic and political developments, since these will have a significant impact on the direction the trend is moving. For example, negative economic news can cause the market to become bearish, while positive news can turn it bullish.
Once the long-term time frame has been charted, the next step for high probability trading strategies is to chart the medium-term time frame. The importance of this chart is that trends of both the short and long-term time frames start to become apparent. In fact, when planning a trade, the trader should refer to this chart the most often. Finally, the short-term time frequency should be charted. This chart will be the one the trader uses when actually making decisions as to when to execute trades. At this level, the trader should be able to pick a good entry point. However, they should also be wary of sudden sharp moves caused by fundamental factors such as the announcement of an interest rate hike. These price moves are just temporary imbalances and, as such, do not represent price trends that signal an entry point for a trade.
Combining all three time frames is vital for creating high probability trading strategies since it greatly increases the chances that a trade will be successful. Using this approach encourages the trader to trade with the longer-term trend, which lowers the risk of a bad trade, as price movements will likely continue to follow the larger trend. To summarize, the long-term chart shows the direction in which the currency pair is moving, and the short-term chart shows support and resistance levels so that the trader can determine entry or exit points as well as where to put the stop loss in order to prevent losses in case the trend suddenly reverses.
« How to Choose Forex Software Trade with the Market, Never Against It »
