Using Higher Time Frame Confirmation in Your Trading
Directional trading, also known as discretionary trading, is what most retail traders strive to succeed at. In this type of trading the traders attempt to figure out the market’s current direction, and either position themselves in that direction at the most opportune time, or wait till the market changes direction and position themselves to be able to profit from a continuation of this new direction. Contrary to what most beginning trader’s think, most traders who work for investment banks or proprietary trading shops are not directional traders.
Many traders employed by investment banks and prop shops are mechanics trained in the use of counter-trending methods who continuously scan markets in search of those times when one market price gets slightly out of line with a related market and they position there firm’s money in those markets so that when price snaps back into line they profit. Or they have created market making programs where they’re computers are constantly buying and selling, trying to take the other side of as many trades as possible and offsetting those trades at a fraction of a pip profit.
We on the other hand, are not interested in that fractional edge. We would rather play the opposite of that game and only trade once, or twice a day, but position ourselves in a market that trends in our direction all day, or two or three days, or two or three months. The way we attempt do this is by trading in the same direction as the higher time frame trends, and recognizing when those trends are shifting. Knowing how to use higher time frame charts to confirm a price signal on a lower time frame is an essential skill for directional traders. Many students will become impatient and take a trade that is coordinated on the lower time frames, and not on the higher time frames. This is a mistake and more often a waste of time, energy and more important money. While you may not always have all the time frames line up, there will be times when this happens and impulsive price action will often follow. More times though the higher time frames will be counter to each other which can provide swing trading opportunities for us. Yesterday was such an opportunity in AUDUSD.
With the short-term trend on the Monthly chart still up — price is above the Monthly Directional Line – and the short-term trend on the Weekly chart down — price is below the Weeely Directional Line — we saw a nice swing trade once the 4-hour chart shifted higher during the London session. The rally carried AUDUSD nicely higher thru the U.S. AM session. While the move was short lived, it provided a nice intraday opportunity, and was a text book example of using direction, or in this case lack of direction, on the highest time frames to give us a set-up and signal on the lower time frames.
To attend a live, interactive webinar tomorrow on determining market directiona, sign up at: Overview of Directional Lines
Jay Norris, who created Directional Lines, is the Chief Market Strategist at Clovernest Financial Group and the author of Mastering the Currency Market, McGraw-Hill, 2009. Jay’s second book Mastering Trade Selection and Management, McGraw-Hill 2011, will be in book stores in the Spring.
DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and is not suitable for every investor. Any charts shown here represent market conditions at a particular point in time. Such conditions may not be replicated in the future. Past performance is not indicative of future results.