Forex Mistake #35 – Ignoring Higher Time Frames

I Am The Higher Time Frame! Don’t Ignore Me!

Traders come in many forms, all with different personalities, risk appetite and trading styles. You have the swing traders, long term investors, day traders and of course the scalpers, but they all have one thing in common: they should all pay attention to the higher time frame. No matter what type of trader you are, you should consider the higher time frame your compass, your beacon in the dark… ok I’m starting to sound like a soap opera so let’s cut the small talk and get down to business.

 

Why Ignoring Higher Time Frames Could Get You Broke?

As you may know the price of a currency pair doesn’t move in a straight line. Without going into too much detail, I’ll just say that you will encounter uptrends (price makes higher highs and higher lows), downtrends (price makes lower lows and lower highs) and ranging movement (no advances are made by either side). However, these trends are relative (just like almost anything else) so if you ignore the higher time frame you could wrongly assume you are in an uptrend but in fact the overall direction of the market is down. A small pullback on a four hour chart could be seen on a five minute chart as a full scale trend and what seems to be a good trend on an hourly chart could be just a ranging market on a daily chart. Because traders have to apply different strategies for each type of market, misjudging the market state could be very bad for your wallet. If you buy because you identified a trend on a five minute chart but the hourly is in a clear downtrend you might get in trouble. Same if you buy on an hourly chart but the daily is clearly bearish.

I will give you an example to understand better: if you only look at the lower (or current) time frame is like driving your car and looking 1 meter ahead of its nose. All you see is probably smooth asphalt, without any bends or obstacles. Ok, but that doesn’t mean that a tree or bend doesn’t exist 100 meters ahead. And because you don’t see it you cannot anticipate it, you cannot make adjustments to your driving style. Heck, try just walking with your head tilted down and you’ll see how difficult it is. Now going back to our trading, the same happens: if you look at only one time frame you cannot see that price is approaching a strong resistance or support level which is clearly visible on a higher time frame and you cannot confirm the real trend. Are there ways around that? Of course there are:

 

How To Avoid Going Broke Because You’ve Ignored The Higher Time Frame

The answer to this question is pretty obvious if you ask me: look at the higher time frame before trading. If you think you’ve identified a trend on whatever time frame you are using, take the time to switch to a higher time frame and use the same method of identifying the trend as you did for the current time frame. If the two time frames tell the same story, then it’s safer to trade. It’s like lifting your head and looking ahead of you, not just 1 meter in front. Here are some tips for how to avoid going broke because you’ve ignored the higher time frame:

  • Use Multiple Time Frame Indicators (MTF). This type of indicators show you the readings for a higher time frame right on the current chart you are trading. For example, you can have an hourly Stochastic right on a 5 minute chart.
  • Match the movement of the higher time frame Stochastic (or your preferred MTF indicator) with the current time frame: if your higher time frame indicator is bullish, look for long positions when the current time frame indicator agrees.
  • Draw trend lines on the higher time frame then switch back to your normal time frame. This way you will see the bigger picture right on the chart you are trading.
  • Look for overbought and oversold conditions on the higher time frame. Your 5 minute RSI or Stochastic might be overbought (suggesting a potential fall) but on a 4 hour chart it might be just coming out of oversold (suggesting a potential climb).
  • Give more weight to the higher time frame. Although this is debatable, I consider that an hourly time frame is way more important than a one minute chart.

 

The Lesson To Be Learned

Make use of all the information available to you. Trading Forex is not something to be taken lightly. It takes a lot of learning and hard work and you have to pay attention to all the hints that you can find. Multiple time frame analysis is one of the most useful tools a trader can have because it offers a more complex view of the market and of its state. If two or more time frames agree on direction, the probability of price going in that direction increases and after all, that’s what trading Forex is all about: probabilities.

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