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The monthly time frame

This is where I draw my major levels of support and resistance. I look at:

• Major pivots (defined by a particular logic - red and green lines on the chart).

• Round numbers (every 1000 pips -  also circled on the daily chart).

• Annual levels - the high, low and close of the previous calendar year (represented by the pink lines).

Using, Time Frames, Build an Edge, Forex Strategy, fx trader, forex monthlyChart 1. Monthly chart

I want to pay particular attention to these annual levels as they represent more than just support and resistance. I also use them to give me a  bias to  current  price  action. If price is trading above the highest price of last year, price has a bullish bias and I look for long opportunities. If price is trading below the lowest price of last year, price has a bearish bias and I look for shorting opportunities. If price is trading between the high and the low, then it is generally considered a consolidation and this is when I stand aside. By waiting for price to trade above the high or low of the previous year, we are now starting to establish that all important edge.

Note: Trading is an art not a science. The high and the low can sometimes be a fair distance apart, which suggests a trending market the previous year, in which an entry point into a current trend may present itself. It would not be a wrong move to test the waters by entering a trade but I reduce my risk accordingly. A full allocation of risk for me is 2% but entering a trade between the annual levels would mean reducing my risk to 1% or less.

The weekly time frame

The weekly chart is where I look for trend direction. This is simply done by using the 200sma to give the overall bias of the market and then the 50sma as support or resistance. The logic of the 200sma comes from before the creation of the internet when traders used to draw charts by hand.  This was clearly a time consuming process and so were very selective of the information  they put on their charts. The 200sma  was proven to be a good indicator of the long term trend.

Using, Time Frames, Build an Edge, Forex Strategy, fx trader, forex weeklyChart 2. Weely chart

To look for the all-important edge on the weekly time frame, I want to see:

In a bull market

• Price trading above the 200sma giving price a bullish bias.

• The 50sma acting as support.

• The moving averages heading up and not flat.

In a bear market

• Price trading below the 200sma giving price a bearish bias.

• The 50sma acting as resistance.

• The moving averages heading down and not flat.

The daily time frame

The setup on the daily time frame is no different to the weekly timeframe. I use the 200sma and the 50sma in exactly the same way to look for trend direction. Ultimately, what I am looking for is alignment between the two time frames which is, I want to see the weekly and the daily moving, or more precisely, “trending” in the same direction.

Note: A mechanical approach will serve you best over the long term but to reiterate the point that trading is an art and not a science, discretion can be and must be applied when called upon. The daily 200sma is the initial driver of the bias so a break above the daily 200sma will give price the initial bullish bias and a break below will give price the initial bearish bias. In the most ideal of scenarios, and to really confirm the edge that we desire, breaking above (bull market) or below (bear market) the weekly 200sma would also be required.

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