TECHNICAL ANALYSIS
it can be determined on a trade-by- trade basis. For example, you may be scalper who monitors every trade on the 15 minute timeframe, you may hold longer-term positions but wish to supplement with intraday trades, or you may simply only trade a higher time frame such as the daily charts. Tis is all fine and this strategy is still applicable to your situation. For this example, lets pretend that you don’t have a
set timeframe
that you like to trade, but you’re eyeballing a setup on the daily chart. We’ll call the daily chart your “trade ma na g eme n t chart”; It’s where you’ll constantly pivot from before making any decision.
one needs to be a higher timeframe and one should be a lower timeframe. Dr. Elder has a rule here for switching time frames. It is what I like to call (or maybe I read it somewhere) Te Fives Times Rule. For this rule, anytime you switch timeframes, you divide by 5 to find the best lower timeframe to use, and you multiply your current timeframe by 5 to find the best higher
FX
Tis is the chart where you originally found the setup on and where you will always pivot from when checking another timeframe.
Te higher time frame and its indicator is used to check for trends, trend reversals, and the strength of the trend. It’s always important to check the higher time frame before placing a trade because you could
find
Since most traders use the default settings, then you want to be making your decisions based on what most traders will make their decisions based on; popular indicators are called self-fulfilling indicators for that reason
You need to choose three indicators to apply to the daily chart and two other charts within the same currency pair. Te indicators that are suggested are those of the oscillating type. My three choices are the Stochastic, Stochastic (yes, I know it’s the same…we’ll get to that in a moment), and MACD. You can also use the Stochastic, CCI, RSI, or any number of oscillating indicators. You can also use the same indicator on all three screens, but the indicator on the highest time frame should be able to determine the direction and strength of the current trend on that chart.
The Fives Times Rule Of the two other charts that you use,
timeframe to use. In our example, since we are using the daily chart as our trade management chart, then the lower time frame would be the 4 hour chart (4H) since 24 divided by 5 equals 4.8 and the 4 hour chart is the closest available chart on most platforms. Te higher timeframe we would use for this trade is the week chart since one day times 5 equals 5. Anytime you’re using this rule or strategy and you don’t have a chart equal to the multiple of 5, just use the closest chart available. Tis is a rule that is helpful outside of this strategy so that you aren’t too far from or too close to your “trade management chart”. Now that we know the basic setup of the charts and indicators, let me explain their purpose.
Te middle time frame, or trade management chart, is used to watch the trade throughout the life of the trade.
that
what might look like a good entry on a short trend on your middle time
frame is
actually a strong support on the overall uptrend on the higher
time frame. Tat would be a very bad situation to put your money in.
Te lower time frame, which is the 4H chart in this situation, is only used for maximizing profits by finding the best possible entry and exit on each trade. Because of this, it is the last screen checked prior to entry and possibly the last screen checked prior to exit. In both cases, it is used simply to maximize profits and ensure that you’re not entering at the worst possible time, like buy during an overbought signal or selling during an oversold signal.
Now, as far as setting up the indicator, I like to leave the settings alone and so does Dr. Elder. Since most traders use the default settings, then you want to be making your decisions based on what most traders will make their decisions based on;
FX TRADER MAGAZINE January - March 2017 53
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