Rick Wright Instructor
So you’ve analyzed the charts and have decided that your currency pair is trading at the right location for a possible reversal – a clear level of supply or demand. The questions in the back of most traders’ minds are, "Will this level hold? Am I too early?" This is where multiple time frame analysis can help a trader decide WHEN to trade. The way I look at the charts is: My larger time frame tells me WHERE to enter, and my smaller time frame tells me WHEN to enter.
A very common problem with new traders is buying or selling too late, or waiting for too much confirmation. By the time the moving average has turned, for example, and the trader buys, the move has already started and your stop loss may be dozens of pips further out than it had to be! The opposite side of buying or selling too late is trading too early. Very often traders will try to pick bottoms or tops, yet the price continues and stops them out. A relatively simple way to fix both problems is multiple time frame analysis.
Figure 1
On this 4 hour EURUSD chart, the blue arrow indicates the lowest risk, highest reward entry on the long side. However, many newer traders will be unwilling to take that long trade as the market has been trending down for the past several days. The fear in this trader’s mind is keeping him from buying, because of the simple fact that the trend may continue down and hit his stop loss. Waiting to buy on a close above the upward trending moving average will get him in, but not until 1.3875.
The experienced trader is looking to the left on the chart and defining his demand zone (which was also a supply zone previously!) from the two dramatic moves to the upside from the 1.3761 level.
This trader will get in, but approximately 100 pips cheaper!
Now the question remains: How can I get a better entry yet still have confidence that I’m not too early?
Figure 2
Using our multiple time frame analysis, we can see on the 15 minute chart that the price action came down into our demand zone TWICE within the four hour candle. This even shows us a double bottom pattern, a very common reversal pattern. So now, waiting for the blue arrow, the trader has a higher degree of probability in their long trade. Still not enough confidence? How about the doji candle with the longer tail, giving a potential bullish reversal? I hope that three reasons to go long at the blue arrow are enough for you! If not, then try throwing in a moving average on this smaller time frame. Waiting for the trend to start will give you more winning trades – albeit with larger stops and smaller winners. If you waited for the close above the moving average on this chart, you would still be getting in around the 1.3790 level – 30 pips higher than the best entry, but about 85 pips better than if you only watched the 4 hour chart!
In class, we call this "timing our entry." Buying in high quality demand zones and selling in high quality supply zones has been covered numerous times in previous Lessons from the Pros
newsletters. The only potential pitfall in this technique is getting in too early. However, with lots of screen time, you will begin to trust the levels you have identified. Using the smaller time frame chart to confirm your entry within your longer time frame supply and demand zones will lead to a higher percentage of winners, and give you more confidence in trusting your levels.
One simple way to watch these charts is to set up two time frames for the currency pair(s) you will be trading.
Figure 3
If you are looking at only one chart and switching back and forth between your long-term and short-term time frame charts, you will certainly miss a trade once in a while. So I do recommend having two charts of the same pair next to each other on your screen. Provided your trading computer has the necessary screen space, why not have these two charts for every pair you trade up at the same time? Trading from a laptop would make this a bit difficult to see the price action, but if you have a larger monitor or three, this would be a very efficient technique.
Longer term position traders will often use daily and one hour charts, swing traders may use 4 hour and 15 minutes, and shorter term may even be using 1 hour and 5 minute charts. Always keep in mind that larger time frame supply and demand zones are more important than smaller time frames, and this technique should help.
Feb 24, 2012: 8:12 AM CST
Though it’s been mentioned frequently on the news, the recent crude oil price breakthrough has been impressive on the charts as well.
Let’s take a look at the current structure of Crude Oil and pay special attention to the breakout from consolidation/resistance, as well as the current “Open Air” pocket to watch.
Here’s the Daily Chart Structure:
I wanted to highlight the main points of the chart, including two trades that developed for aggressive traders.
First, Oil struggled against the $103 overhead resistance level and formed a clear sideways trading range (Rectangle Price Pattern) between $95.00 and $102.50 as labeled above.
This allowed an opportunity to play a “Support Bounce” (including the 200d SMA) from $95.00 as February began.
The initial target for a “Range Play off Support” is always the top of the range or resistance – in this case near $102.50.
When price broke firmly above the $102.50 line and began trading even higher than that this week – particularly on the break and close bar on February 17th – it triggered a Breakout trade.
That breakout trade is still in motion, though there’s no clean/easy entry after the initial breakout (per breakout trading logic).
Here’s the Pure Price Chart to highlight the current “Open Air Pocket:”
The $102.50/$103.00 area was important as it provided prior areas of resistance from mid-2011 to present – particularly from May/June.
The firm breakout and continuation move higher this week officially enters the “Pocket” of Open Air between $105 and $115 – there’s no obvious price resistance between those zones given the sharp drop in May.
While price may not continue straight up/directly higher without some sort of retracement, price may ultimately continue its higher movement towards the prior reversal high at $115.
This is the logic of “Open Air” – looking backwards on a chart to see any obvious price targets or levels. An absence of these barriers suggests continued movement through the “Air Pocket.”
For those wishing to look inside the Daily Chart, here is the Hourly Chart Structure:
I wanted to make a quick note from an educational standpoint, particularly with regard to higher timeframes.
Note the $95 confluence support area on the Daily Chart and now view the structure as it appeared at the beginning of February.
The Hourly Chart showed a downtrend developing multiple positive momentum divergences into the Daily Chart’s confluence support at $95.00.
This helped confirm the bigger picture “Retracement” or “Range Bounce” play mentioned above.
Eventually, price broke through the falling Hourly trendline and developed a “Kick-Off” surge in Momentum – an early chart signal of potential trend reversal.
This provides a good example of one of my favorite ‘complex’ trades:
Higher Timeframe Support + Lower Timeframe Positive Divergences/Kick-Off Signal
Eventually, the Breakout Trade developed from this week’s breakthrough beyond $104.00 and
$105.00, placing us in the current “Open Air” Zone.
For now, let’s watch price in the context of the Daily Chart’s support level near $103 (if you’re bullish, you don’t want to see price return back under $103 anytime soon) and the current
impulse/trend move making its way through “Open Air” perhaps all the way back to $115.00 as a potential target.