Downward Approach to Futures/Commodity and Forex Trading
There is an old saying about not about 'not seeing the trees from the forest'. When it comes to deciding whether to buy or sell a Futures, Commodity or Forex contract, this can actually be a good thing in the beginning. At the level where the trees are, the lower time-frame such as the daily price chart, you witness the market (Futures, Commodity or Forex) trending up, down and sideways. In fact, it often can appear quite 'noisy' to the untrained eye. Deciding whether to buy or sell based solely on what you see on this lower time-frame can be quite a challenge. However, approaching this problem from a 'higher' view can be a great help in smoothing out the overall view of the market in question. This would be looking at the 'forest' first before focusing on the 'trees'.
Often you can get away with just going one time-frame above that which you trade from. For example, if you often allow your trades to continue overnite for one or more days, then it is likely that you use the 'daily' price chart to make your final entry decisions. Therefore, one time-frame higher would be the 'weekly' price chart, where each price bar represents a whole trading week (5 days). If you are a day trader, one who does not normally leave a position on overnite, and you use the 5 minute chart for your final timing decisions, the 10-min, 30-min, 1 hour and daily charts are higher time-frames in respects to your preferred time-frame for timing trades. For the rest of this article, we'll assume you normally use the daily chart to make your Futures, Commodity or Forex trade decisions. Thus, the next time-frame higher (our forest) would be the weekly chart.
Start by taking out your weekly price chart of the market you wish to analyze. What you want to look for is whether the overall weekly trend is up or down. Basically, a bull trend is one that forms higher swing bottoms and higher swing tops, and a bear trend forms lower swing bottoms and lower swing tops. There are exceptions to this general rule. However, an indepth discussion on trends is beyond the scope of this article. I invite you to visit my repository of articles and lessons at the ProfitMax Trading, Inc. website for more information on this subject and others.
If your examination of the weekly chart reveals that it is bullish, then you'll want to focus on looking for buying opportunities off your daily Futures, Commodity or Forex price charts. When looking to buy off the daily chart, entering as close to retracement bottoms will provide you with the lowest risk and highest profit potential trades. If you determined the weekly trend to be bearish, then you'll be looking for shorting (selling) opportunities, selling off of rally tops. If the weekly trend is narrow sideways, find another market to trade unless you like to trade channel swings (hopefully you are aware of channel breakouts - be prepared). Wide sideway trends on the weekly charts would suggest you simply trade in the direction of the current weekly direction. If the weekly trend is currently moving up, buying off the daily chart on those retracement (dips) pivot bottoms will provide you with the better trades.
Whenever I plan a trade, I look at the larger picture. I want to get a good idea which way the market wants to go. If you look at any higher time-frame chart, such as the weekly or monthly price chart, you will see that when the market is bullish for example that the daily chart will be bullish for a very, very long time. Momentum is a very powerful attribute in the Futures, Commodity and Forex markets, and the trend of the higher time-frames will often tell you what that momentum is on the daily chart (the lower time-frame that you are basing your final buy/sell trading decision from.)
Be aware that even weekly and monthly trends can change at anytime. Yes, you can go to the next level up, monthly charts, and note which way it is moving to get an idea of likely, weekly direction. But be careful not to lose your perspective. Although trends take a long time to change, someday it will. At that point you will need to be prepared.
Using this 'downward approach' to Futures, Commodity and Forex trading, you are getting the 'big picture' first. You are looking at the 'forest' before getting down and looking closer at the 'trees'. Once you have done this and have a good idea what the longer-term picture looks like for prices, you can then focus on your timing technique to 'fine-tune' your trade timing decisions. As many successful traders know, TIMING IS EVERYTHING! As a market analyst and trader, my preference for timing is based on market cycles and their cumulative affects, that which causes market tops and bottoms.
Always remember that it is the 'law of probability' that you want on your side of every trade. You want the odds in your favor. You do not want to risk too much or be overly exposed. You want to buy low and sell high. All this depends on you seeing the 'big picture' as we have just discussed, and a method of precision timing to get the best price possible for the lowest risk exposure.
Rick J. Ratchford has been trading since 1989 and since 1996 is an Analyst for ProfitMax Trading Inc., a membership for traders specializing in the advance forecasting of market tops and bottoms for Precision Timing the Futures, Commodity and Forex markets.
http://www.profitmaxtrading.com. "Know Today the Market Turns of Tomorrow!"
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