Using Multiple Time Frames - A Profitable Strategy When Trading Forex?

You will generally find that most people who start trading the various currency pairs

focus on developing a trading strategy that they can use on one time frame. This could be the 5 minute, 1 hour or daily chart, for instance. However is this really the best strategy?

Well there's no doubt that you can make money trading a single time frame. In fact I've recently started using a day trading system that only ever takes positions on the 15 minute chart.

However in general it's a lot easier to develop a strategy based on two or three different time frames. The reason why I say that is because by doing so you can identify the long term trend using the longer term charts, and determine your entry and exit point on the short term chart. You can also ensure that you are always entering a position in the same direction as the long term trend. Therefore the odds are always in your favour.

For instance if you are a short term trader who likes to trade the 1 minute chart, you should ensure that you are entering trades in the same direction as the trend on the 5 minute chart, and maybe the 15 minute chart as well for additional confirmation. That way you can filter out only the very best trades.

I myself like to take positions based on the 4 hour chart. However I use the daily chart to tell me which way I should be trading. If the trend (determined by one specific indicator that I like to use) is up on the daily chart, then I will only be looking to go long on the 4 hour chart, and vice versa if the trend is down. On the rare occasions when I haven't stuck to this rule, I have often found that any price movements on the 4 hour chart have run out of momentum very quickly, and I start kicking myself for trading against the long term trend.

So the point I want to get across in this article is that it often pays to use more than one time frame. By looking at a longer term chart and determining the overall trend, you can put the odds firmly in your favour by only trading in the same direction as this trend on your favoured shorter term chart. It's not essential of course, but it certainly helps to increase your overall success rate.

by: James Woolley

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