Forex Mistake #6 – USING ONLY ONE TIMEFRAME FOR TRADE SELECTION

Posted under Forex Tips on Monday, 21 December 2009 by admin

As you can see, it is my opinion that psychology is vastly more important to lasting trade success than anything else. I really believe that trader psychology is 95% or more of lasting success. Part of what shows this clearly is how traders focus on time. Every trader reading this will already have some idea of how much time is “required” for a trade to work; even if it is just a fuzzy sort-of feeling that you need to “give it time”

I realize that this particular discussion of this particular mistake might be over a few heads at first. For those who might be saying “This is a bit much for me” I want you to try and follow along anyway. I promise to make what appears to be a difficult concept very simple to understand.

Suppose you do a trade at this moment. When do you expect that trade to make money?
I’m sure you answered to yourself immediately and said “By (such and such) time” or something close, correct?

That amount of time you thought of, in almost all cases, is too small for that trade to work.

I say this because most traders do not stop to consider anyone else in their trade selection; and this is even truer if you are using a “system” provided to you. It is very important for you to consider that if you are attempting to trade using a particular time frame (say a five-minute price chart) there are only so many people using that time frame as far as all the people in the market are concerned. There are traders using one-hour charts to find a trade, 120-minute charts, 15 minute charts, daily/weekly/monthly charts; all sorts of different time frames.

Even if those traders are all using the exact same trading system, each of those different time frames will tell a different story about the market. It is completely possible that you might get a “buy” signal on your chart at the exact same moment someone else is getting a “sell” signal on their chart—even if you both are using the same trading system.

After you put the trade on, each of you will then wait a certain amount of time before liquidating your trade. The amount of time you wait will both be different. For the smaller time frame trader this amount of time will only allow for a certain amount of distance in the price movement; the scale is “smaller” To illustrate this thinking a bit more, have you ever done a trade and closed it with a nice gain only to see that market move considerably farther in your favor over the next few hours or days? You would have made a huge profit if you would have waited just a bit longer. The reason you didn’t wait is because you are using too small a time frame and your system gave you a false signal to get out. The most common problem with using only one time frame for trading is cutting a profit short.

use multiple timeframe is important

The important thing to remember is that the market is a very big place. There are literally millions of individuals trading. They represent everything from college students hoping to make a few dollars for tuition to multi-billion dollar multi-national investment banks and even governments looking to hedge huge amounts of money. All of these individual traders have different needs and goals from their trading. Sometimes they operate on time horizons that are several years out from now. Sometimes they are “scalping” for only a few PIPS and are out in seconds.
All of these time frames are competing against each other and for the most part the people with the longest time frames are usually the winners. You want to trade WITH the big players and not AGAINST them. By going in and out of the market too quickly you lose the benefit of the large player pushing the market in a particular direction over time.

Think of it this way:

Even a dead fish can float downstream. It takes a lot of effort to swim against the current. It is always easier and more cost effective to go WITH the largest traders in the direction they want the market to go. By using a larger timeframe the overall trend is easier to see and it is usually the more accurate one. Once they get the market moving in that direction it will go a long way over time; be the trader who is flowing with that larger amount of time. Don’t jump in and out all the time.

HOW TO MAKE THIS MISTAKE WORSE: Ignore what large traders are doing and focus only on your chart, use your system exactly the same way no matter what it says on a different time frame, don’t place a stop-loss order, add to a losing trade, ignore broken support or resistance on a larger timeframe, go against the bigger trend.

SOLUTION: Use three time frames lower than yours and three time frames higher than yours to get a better idea of what other traders might be thinking. Look for conflict between the timeframes such as a sell signal on one chart and a buy signal on another when using the same system on both; always go with the larger time frame signal.