Multiple Time Frame Forex Strategy.

One of the most dependable features of the Forex market is its tendency to form trends in a variety of time frames. Forex trends can continue for weeks, months, or even years, and traders who align themselves with these trends improve their chances of success. Let’s look at some specific techniques to capitalize on this well-known forex market tendency. Frequently when we trade, we may look at Forex currency pairs chart and receive contradictory signals from various indicators. Which signals should we follow, and which ones should we ignore?

Multiple Time Frame Forex Strategy.

When we are in doubt, it’s helpful to look at the big picture, by moving to a longer time frame. Let’s
assume for our example that we are placing trades based on the Forex hourly chart:

1) First, look to the longer-term chart, which is the daily chart in this example, to see if the currency pair is trending. There are several ways to do this. Simply draw a trend line, or use an indicator that is designed to determine market trend. For instance, the average directional index (ADX) indicator could be used to determine if the market is trending. Or we could look to moving averages to determine if they’re in the “proper order” formation.

2) Often, the trend will be obvious without the use of any trend lines or indicators. The best trends are the ones that are obvious, because other traders can see the trend and act on it, creating a “self-fulfilling
prophecy.”

3) If the currency pair is trending higher, trade from the long side only. If it is trending lower, trade from the short side only. If there is no discernible trend, then don’t attempt to place a trade using this technique, as it is specifically designed for use in trending markets.

4) First, we’ll determine the direction in which we want to trade from the long-term chart. Then, we’ll look to the short-term chart to locate our entry point, stop, and exits.

5) If we have determined that we are in an uptrend on the daily chart, we can go long if the price falls to a level of support on the hourly chart. Or we can go long if an oscillator, such as Relative Strength Index (RSI), indicates that the pair is oversold on the hourly chart. Enter long with your stop below the area of support.

6) In the case of a downtrend on the daily chart, we will seek to sell at resistance on the hourly chart, or if oscillators indicate that the pair is overbought on the hourly chart.

Remember, if the daily chart is in an uptrend, we can only go long. If the daily chart is in a downtrend, we can only sell short. If we cannot tell if the market is trending, then we cannot use trending techniques such as this one.

As you will see, there are many variations on this theme. Essentially, I’m going to use everything at my disposal to locate good entry points and put my trade in harmony with the Daily Forex Trend.

Why does it work?

This system allows us to trade only in the direction of the overall trend, and it requires that trades can be placed only after the price has pulled back to a favorable entry point. In other words, it will not allow the trader to enter long at the highs or enter short at the lows.

This Forex technique can also be used in shorter time frames. For example, an active day trader can use a four-hour chart as the longer-term chart and a 15-minute chart as the shorter-term chart.

Take a look at this long-term trend in the U.S. dollar/Canadian dollar currency pair in Figure below. As you can see, the exchange rate had been falling steadily for years, from above 1.60 in 2002 to below 1.10 in 2006. During these years, the prices of commodities like gold and oil made spectacular gains. Canada, a major producer and exporter of energy products and metals, benefited from the increasing flow of capital that it received in payment for these goods. This is why the loonie is often referred to as a “commodity currency”.

Trending Techniques,Forex Analytics,Forex Charts.

This increased flow of capital served to strengthen the Canadian dollar, as importers such as the United States were forced to send more of their wealth to Canada in exchange for these materials.
The trend became particularly pronounced during the spring of 2006, fueled by a fierce rally in metals like gold, silver, and copper. The rally helped to push the Canadian dollar to a 27-year high versus the greenback, and simultaneously the currency pair reached multidecade lows in early May.

Then in mid-May, after a spectacular run, gold, propelled by massive hedge fund buying, peaked at $730 per ounce. At about the same time, the USD/CAD currency pair bottomed out. As profit takers emerged, gold began to float lower, and the USD/CAD pair began to drift higher. As trend traders, our objective is to use this trend to our advantage. Because the currency pair is in a downtrend, we will look only for short entries, and ignore any opportunity to go long. Since the pair is rallying, we need to locate our entry point. We want to locate a major resistance level.

Easy Forex. Forex Indicators. Forex Market.

Next time we will see another type of Forex Trending Technique.

Forex Strategy.