You see a nice potential trade that perfectly fits your system. Before hitting the Trade button, you want to perform another test: does the direction of the trade fit a longer term trade?
And now the question is: how high should you look? Here are a few suggestions.
“Make the trend your friend” is a cliché you’ve heard many times in the past. Yet this cliché is true. In a perfect world, you would want all the charts to point in one direction: from a one minute chart to a monthly chart.
Life and also forex trading aren’t perfect: you often have conflicting signals. This applies to fundamentals as well.
First of all, it’s better to start with a higher time frame. Are you basing your trades on a 1 minute chart? Think again. This chart usually includes a high amount of “noise” that may be misleading.
A one hour chart is better. 4 hour charts are popular as well, but also 15 minute and 5 minute charts.
If you’re using a 5 minute chart, please check the trend with at least a one hour chart. The proportion is X12, but it’s important in this case.
If 15 minute charts are applied, please take a look at 2 hour charts. The proportion here is X8.
For 30 minute charts and for one hour charts, a comparison with 4 hours charts is sufficient. The proportion is going down as time frames rise.
For 2 and 4 hours charts, 8 hour charts will be nice.
For 8 hour charts and higher, a comparison with the next level is nice to have, but you’re already on much more stable ground, so this is not a must – just a bonus.
As the time frames rise, not only do comparisons with higher time frames fall, but also the importance of fundamentals rises. Long term moves are more dependent on majors shifts in economies, interest rates and also politics.
Short term moves can happen due to a random speculation by a random hedge fund.
What time frames do you use? Do you compare with higher time frames?
Further reading: 5 Most Predictable Currency Pairs – Q2 2012
By Yohay Elam, Forex Crunch