If you are a day trader, you will have a very short trading life if you can’t consistently get yourself aligned with the current trend of the market. So, how do we know which way the market is likely to move?
When you first sit down at your computer, there are some critical tasks for you to look after. First of all, you need to know what fundamental news announcements are going to be released during the time you’ll be looking for trades.
Are they significant numbers?
How much volatility is normally associated with these numbers?
Are you comfortable trading in that environment?
Do you have a risk control plan in place that addresses the issue of higher
expected volatility?
Keep in mind that any announcement can cause big excitement (volatility) if there is a large deviation from the consensus expectation. In fact, large moves can occur even if the announced number is in line with expectations! But that’s another story for another day. The point is, as the Boy Scouts say, always be prepared.
If you don’t know the answer to any or all of the questions above, you’re going to be the recipient of some nasty surprises from time to time that don’t have to happen if you’ve planned things properly, notwithstanding the fact that sometimes, despite our best efforts at planning things out, the market just simply doesn’t go in the direction we anticipated — that’s just part of trading.
Assuming you’ve handled the issue of economic releases, your next task is absolutely critical, and that is, the ability to perform a proper top down analysis. What does this mean? Quite simply, find out what the bigger picture is doing and align your trading in that direction.
If you are using a 5 or 15 minute chart for your entry, it is not enough to just confine your analysis to those charts. I have talked to people that hardly even look at a chart beyond the 5 minute! As you can imagine, that will simply result in having your account chewed up very quickly by the markets.
I will give you what I consider to be a very good piece of advice. Spend less time on your lower time frame charts, and spend more time on the higher time frames (hourly, 4 hour and daily charts etc if you’re day trading). You will start to see things in a new way. You will notice support and resistance areas that you never noticed before. For example, have you ever bought and then almost immediately seen price make an instant and substantial move against you, stopping you out? You were obviously at some kind of a major resistance area and didn’t even know it! Maybe the 5 or 15 minute chart looked just fine, but consider this: The 5 minute and 15 minute charts are subordinate to the hourly, 4 hour and higher charts! The higher time frames have the strength, so you need to figure out what the higher time frames are doing and then look for a trade based on that information.
In part two of this article, I will show an example of how we want to look at price action top down in order to give ourselves the best chance possible to structure a winning trade.
Remember, keep your risk under control at all times, and watch the higher time frames for clues!
Here is a statement that I always emphasize to people who take a personal coaching session with me: “Always align your trading with the higher time frames!” Whatever time frame you’re trading 5 minute, 15 minute, daily, etc, figure out what’s happening in the bigger picture, and then use the smaller time frames to structure a good, low risk, high reward trade!
So let’s take a look at how we might use this information to find a trade.
Earlier this week, on December 18th, 2006, the USD/CHF had rallied off of a yearly low and as it came up, you should be asking yourself where it would be logical to expect price to stop going up. Where is there going to be resistance in the big picture?
Well, actually there was a convergence of several different tools on the daily chart that told us that we could expect a top just over 12200. Obviously I can’t go into great detail in this article on all of the different tools. But I want you to realize how powerful it is, and how important it is, just to know that there was a coincidence of no less than 4 independent tools that we like to use. All these tools converging at one price, indicating that we could expect price to stop going up at that point! Folks, that is good stuff to know.
The next step in the analysis is to then examine the lower time frames to see if they are offering any further clues that we might be at a top.
Well, last week I talked about the power of MACD divergence to price, and how divergence on higher time frames can offer great trading opportunities on the lower time frames. Now, when price had reached the major resistance that we had expected on the daily chart, take a look below at what MACD was doing on the hourly chart:
This is a thing of beauty! Once you see MACD negative divergence on the hourly chart, you are now getting positive confirmation that a top is likely at hand. The next step is to simply go short using whatever entry method that you like to use - Fibonacci, stochastics, trend line breaks etc.
At this point I want you to realize that entry becomes a personal choice, but what’s important here is that by doing a proper top down analysis, you got the direction right!!
Thanks traders, best of luck in your trading, keep your risk under control at all times, and make sure to do a thorough top down analysis
0 comments:
Post a Comment