Successful trading requires having a firm understanding of the risk and reward picture before taking a trade. It requires having a good idea as to the trend direction of the market within a time frame that is higher than the one used to trade from.
For instance, if a trader usually takes trades that do not last more than one day, then it is likely that intraday charts are used in making trading decisions. These may be charts ranging in time-frames of 1 minute up to a few hours. For this type of trader, it is beneficial to know the daily trend, which is the next higher time-frame from intra day charting.
The trader who places trades based on a daily chart would be wise to determine what the weekly trend happens to be, the next time frame above daily. And for those who trade long-term and base trades from weekly charts, knowing the monthly trend would be expected.
As simple as this happens to be, it is quite common for traders to excuse this important step in the analysis. However, for the trader who seeks to have the power of the markets behind the move, the higher time frame should be consulted to determine whether to be a seller or buyer.
Take for example the trader who prefers to place trades based off a daily chart. Such a trader is likely interested in staying in the trade for at least a day or two, even longer. In such a case, the trader should consult the weekly chart, which is the next higher time frame, and note the likely trend.
So with the weekly chart, suppose the pattern is one of higher weekly swing bottoms and higher weekly swing tops. This is a typical pattern for a bull trend.
Acknowledging that the weekly trend is bullish, the daily time frame trader would then only consider taking trades that are designed for bullish markets. This may be long positions in the futures, buying Calls or selling Puts in options, or perhaps a spread strategy that favors the bull move.
Once the direction of the trade has been decided based on the higher time frame trend, it is important to know 'when' such trades are best taken.
For example, just because the weekly trend is bullish does not necessary mean a long position off the daily time frame will meet with favorable results. For even when a trend is bullish, it will have bearish corrections along the way. Therefore, to get the power lift from the higher time frame, it is best to get on board when those trend corrections at the higher time frame had ended.
In the case of our weekly bull trend example, the best time to buy off the daily chart is when the weekly chart is putting in a higher weekly swing bottom. These higher weekly swing bottoms occur usually at the end of a bull trend correction. Just like the best place to enter a daily chart is off a daily trend correction that is ending, the best time to do this is when the higher time frame is also ending a trend correction.
Once the trader becomes wise to this simple but important fact, all that is left is to learn the simple techniques that help determine what the trend happens to be on any given time frame. Simple methods include looking for the obvious higher swing tops/bottoms for a bull or lower swing tops/bottoms for a bear trend, noting correction ratios such as 50% pullbacks or the commonly used Fibonacci and Gann ratios, and whether a correction appears oversold or overbought based on indicators designed for this purpose (Stochastic, MACD, COT, etc.).
As a market cycle analyst, my preference to determining when trend corrections are likely ending is by calculating whether a market turn is highly probable due to dynamic cycles, such as is forecasted using my FDate algorithm amazingaccuracy.com. Along with this, I will also employ a powerful technique for figuring out trend overbought/oversold parameters to further support my findings.
However you decide to calculate the likely end of a trend correction, remember to use the trend of the higher time frame, and wait for the end of a correction to that trend, to assist your timing and trade direction on the lower time frame. By doing this, you will allow the market to 'power lift' many of your trades.
Learn more on how to increase your profit potential with other free articles found at our Precision Timing of the Futures, Commodity and Forex Markets website.