A Failed Pattern And A Few Trading Insights

By | November 10, 2014

I believe that a multiple time-frame analysis is necessary in order to get a clear picture of the trading environment.  That means looking at charts starting with the weekly time-frame (on weekends) and going through the daily, h4, h1 and 15min during trading days. Most of the time I seek confirmation from price action/chart patterns on the 1h chart and usually enter the trade either on 15min or 1h. I believe that is the best balance between  risk/reward and ‘noise’ removal. Meaning, on lower time-frames, 1min or 5min, there tend to be too many fake moves. After all, it takes a lot less buying/selling power to move the financial instrument (currencies, stock indices and so on) for 1min or 5min than it takes to move it for 15min or 1h. As a general rule of thumb, the bigger the time-frame, the better the confirmation signal is.

That doesn’t mean we should only look at the weekly charts, although there are successful traders out there that advocate weekly and monthly time-frames. It’s my belief though that would be a sub-optimal use of both time element and risk/reward. Not only is the risk/reward better when entering on lower time frames, but it gets you out sooner in case the trade goes wrong and gives you more opportunities to pyramid in case it goes your way. I’ll give an example with a recent DAX30 trade taken on a break-out of a continuation H&S pattern. Note that for the 15min – h1 entry the time spent in this losing trade was less than one hour with a total loss of around 25 points. For the 4h-daily entry the time spent in the trade would’ve been around 24 hours with a total loss of more than 100 points.

GER30H1

DAX30 h1

GER30H4

DAX30 h4

GER30Daily

DAX30 Daily

 

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