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Forex Day trading With Multiple Timeframe Analysis

Forex Day trading With Multiple Timeframe Analysis

Day Trading With Price Action And Multiple Timeframe Analysis

It is not uncommon to see people new to the business of trading try to utilise 5 minute charts and experience numerous losses in the process of doing so.  This is not to say that trading higher timeframe charts is a simple path to success  – because it is not. Higher timeframe charts do however remove some of the noise which is exacerbated when trading with the lower timeframe Forex charts.   A 20 pip stop loss can be hit in seconds during major event risk or even on interaction with a technical level.

Does this mean that lower timeframe Forex trading is an exercise in futility?  I would say this is not the case but an awareness of the bigger picture is essential.  This post will look at a top down analysis piece which culminated in a trade on the 5 minute timeframe charts.  As you will see there was a lot of thought going into the setup and it was not limited to the 5 minute chart in isolation

Market Sentiment Overview

This trade was on the GBPUSD currency pair.  Our weekly GBPUSD analysis brought to light the following information re the pound/dollar major.

  • Price was trading just above the psychological 1.6000 GBPUSD handle.
  • Commitment of traders COT report data showed the pound was relatively robust in terms of non-commercial (large speculators) positioning.
  • Price was moving into a confluence area of potential support on the higher timeframe charts.

Now you may see this as irrelevant, when looking to trade intra-day on the lower timeframe, but it tells us there is a chance the bigger traders will be looking for GBPUSD longs as the new week begins.  At the very least it shows us that the market is not “overtly” bearish on the pound.

New week Begins – Dollar Gaps Higher

Further to this we have a gap down on EURUSD and the dollar index gaps higher.  The gap was still open as the Frankfurt/London Open session begins  and some traders may be looking to initiate a gap trade play.  This information is noted down before the trading day begins.

Price Had Not Closed Below 4 Hour Timeframe Support

close below level breakout 2012-05-14_11-13-01

So the top down analysis had shown that price did not close below support. If the bears are trapped in a net breakeven or worse trade and do not see further downside they may need to liquidate positions. Even if they have a profit on the table and see price stalling at support they may become nervous and take a profit before the London open.

Frankfurt/London Open

gbpusd triple bottom london open 2012-05-14_07-44-58

All of the above is supplementary information compared with the last piece of the puzzle.  As the Frankfurt and London markets open cable tests double bottom area support following a strong 5 minute bearish candle (see price action within the red circle above). 

The next candle (prior to the trigger candle) is hinting that price my be running out of bearish momentum with the small wick below.  This is not really a strong signal on its own though.  The next candle was my trigger to go long.  A 5-minute bullish engulfing candle at the double bottom area.  A 5 minute trade signal like this is not uncommon but the time (liquidity hitting the market at European open) and location (price structure support) made it stand out in my eyes. 

Time To Initiate The Trade?

I was already aware that there was not event risk due and had checked the financial calendar schedule.  The spread was checked before trade initiation to make sure it was acceptable.  The exit was at the horizontal dotted black line above.  Traders differ in this area (profit taking) but I prefer to grab a quick profit and minimise risk.

The trade lasted around 10 minutes and went smoothly to the target (it does not always work out so well… trust me).  If price had of hesitated at the down sloping trend line a decision would have need to be made regarding potentially closing out early.  

Hopefully this gives an insight into the preparation that goes into a trade idea.  Do not go out and try to replicate this.  The post is purely for commentary purposes only and not a recommendation on how to trade.  Take care out there.

 

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