Time out

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One of the big attractions of technical analysis is that it’s quite transferable across different asset classes. This has been of great benefit to traders who have been dealing in shares and have then wanted to start dealing in foreign exchange and commodities. The trader can be happy knowing that an up trend is an up trend regardless of the product they are trading but the issue then begins to get a bit hazier because there are always fundamental factors to consider. In addition, and I think this is the biggest issue for traders, is what happens once they start dealing in smaller timeframes than they are used to.
Taking a look at the fundamental factors first the trader should always be aware that new data is what shifts markets. For example, at the time of writing we have been treated to unemployment figures in Australia that came out worse than had been anticipated. The most immediate visible effect came from a fall of about a full cent from the Australian dollar. While this may not sound like a lot in FX terms it is an extreme fall. Whilst I try to be supportive of the view that a trader can survive on technical analysis alone, when it comes to markets such as FX it just isn’t true. Happily though these punches get well telegraphed to you because it’s easy to find out when the data releases are due to occur. While it’s not always the case it will generally be a good idea for intra-day traders to stand aside when this data is released. If you are caught on the wrong side of a data release it can be very expensive and even with a stop-loss order in place you will still be gapped over and suffer some significant slippage.
The next question, then, may be how position traders in FX manage to hang on to positions through news such as this as they try to capture trending movements and the like. The big difference comes down to position sizing. For a trader who is looking to capture a large trending movement then it becomes important to allow the position plenty of room to move which means that the stop loss will need to be placed quite a large distance away from the entry point into the trade. Accordingly, based on any standard position sizing method, this will mean that the trend trader will be carrying a much smaller position than a person looking to trade positions based on a breakout of a formation on at 15 minute chart. From my perspective, this difference in position sizes is evidence enough as to why short term traders need to be very aware of any new data that is expected to be released because it can be very costly if they get it wrong and can’t get out of a position in time.
On this alone I would suggest that anyone looking to make a foray into FX get themselves a good understanding of what makes this market tick. Like any market it all comes down to supply and demand but you need to know what influences those factors. You will find that most of the factors in the FX market relate to the future perceptions of interest rate settings but you need to find out how that little puzzle fits together – if only for working out when not to be in the market.
The next issue will start to arise for traders as they move into timeframes less than a day. This means they are no longer looking at daily charts but instead are starting to look at hourly, 30 minute and maybe even as short as 1 minute or even tick charts. Before you go racing for these very short term charts have a think about what you are about to do – you are essentially saying that you will predict the value of currency movements over a time period as small as the next 15 minutes or so. This is short term in anyone’s language but you get the idea of what I am talking about.
Something that we do quite a lot when it comes to looking at trade setups is to use a dual-timeframe filter. This means that you are trying to get into positions that conform not only within the time period you are interested in but also within at least one longer time period as well. When it comes to daily setups we may be looking at something like a Fibonacci cluster and be expecting the possibility of a price reversal at a certain price level but in addition to this it may be a good idea then to add on an indicator overlay such as a stochastic oscillator or an RSI. On the daily chart you would look to ensure the oscillator is not in overbought territory if you were planning to go long. What you may then decide to do it to look at the next higher timeframe which is the weekly chart and then perform the same check using the same oscillator. It’s quite remarkable how often this type of rule will exclude trades that would have on their own looked good. This of course is something that you will need to test because as with any type of trade there will be those that go bad even after satisfying both rules and vice versa.
This concept though is one that may make life a lot easier as you start to move into smaller timeframes. As I suggested earlier the smaller your timeframe the smaller the margin for error you have with timing. Accordingly I would suggest that once you have decided on the setup that you are hunting for then add something that can be checked on one or more higher timeframes. If you are looking at pattern recognition it’s no good to look to see if it’s still there on a higher timeframe because it will be – thus not helping you. Oscillators with overbought and oversold levels are likely to be a very good first port of call in this case.
I have touched briefly on two concepts that I believe are key when trying to shift into a new area of market trading and that is to know what is likely to move the market suddenly as well as steps to take to flesh out the very good trading opportunities. As always I cannot stress enough that you test your methodologies first before putting money on the line. While wanting to get in and have a go may be tempting, no matter the market we must focus on capital preservation in front of all other considerations.

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