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Time frames and a trading bias

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Matching time frames to build a trading system.

When establishing a trading method based on the two R’s of risk and return, it’s management of trading decision based on proven observations that will dictate the outcome of any trading system be it a discretionary or algorithmic. Often the focus and reasoning behind trading are “how much can I make”? This internal thought process often goes one step further and asks how much can I make in a short amount of time?

New traders are often blinded with the hindsight of seeing past data and are convinced that the outcome going forward will be the same with the constant internal observation and confirmation of what if I had taken that position and traded at that turning point the profit would have been huge!

This thought process is often the undoing of many new traders as they work at the right-hand edge of the chart with constant data flow appearing. Looking at some past data charts and imagining the outcome going forward can create an illusionary picture of future outcomes that keeps the trader in a potentially destructive trade outcome.

With the constant data flow in real time, the trader can be swept into the intra-period momentum trade well before the trading period is finished only to be left holding a less than desirable position.

What does this mean?

Traders, in particular FX and futures traders use intraday time frames of choice, like 1-hour charts or 15 minute and many of the variables available in this technology driven endeavour. There is nothing wrong with that, except trading decisions are often made during the formation of the price bar or candle not at the roll over time between sessions. For example, a trader using one hour charts should be making the trading decision at the rollover of the hour, because within the formation of this price data point many interpretations can be made on the variations in the shape of the price bar or candle on the way to being fully complete at the end of that time frame period.

Entering positions before the time period rollover can be very challenging to the thought process as the trader often makes emotional decisions with correlations in the current moving price action to something in the past. This type of trading is subject to a variable and random outcome that will lead to disillusionment with the process as a whole.

 

 

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What’s important about this? Consider the hammer candle shown in the right graphic during its formation has appeared as a continuation of the previous move down and at times was confirmed within the one-hour time frame shown left only to be completed into a reversal hammer.

** Establishing the trading decision on a higher time frame can only be done at the completion of the rollover into the next period and the bar or candle is complete.

Part of building a rule-based system hinges around this method, as does the basis of many trading algorithms. Time frame trading is best established by using two-time frames related to each other, such as 1 hour and 30 minute or daily (24hr) and 12 hour. Using the completed bar or candle in the higher time of choice to establish an entry decision at its completion fulfils the first part of a rule-based trading plan. A lower time frame is then used to garner the actual entry into the anticipated move. The will include the continuation and break of the high of the decision bar or some form of shorter time frame entry method at the completion of its own rollover period. An inside period is a great example of this when worked against the higher time frame. Stop loss from the higher time frame can be immediately established at the low or a factor of the low, a factor of the low is taking the low of the period and moving the stop loss a few pips or cents further away.

Now the rule-based trading plan comes to fruition, with the high time frame entry alert and the lower time frame entry into the position. This can be back tested with a pencil and printed charts and is worthy of your attention.

 

 

 

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Extremely well explained and must admit to falling foul of using pre-data to place a trade when first started out.

I now use two very simple systems.

1. Never buck the trend.

2. Use multiple charts Ie; 5, 15, 30 and one hour charts with a fifth 1 minute chart. If its a 10 minute trade, then all last candles should be the same colour, and use the 1 minute candles to decide optimum time to enter the trade. As for signals, Ive found the tried and tested Bollinger and Stoch are excellent cooperating ones.

Its true that not so many opportunities present themselves this way, but when they do, they win.

BUT, one should always be aware of any underlying events or news that may affect your trade.

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