INDICATORS
Blending Time Frames With Forex
Directional Ratio Revisited
by John "Jay" Norris
When trading, you must look at different time frames. Here's how you can blend the different time frames using the forex market as an example.IT used to confuse me when I'd be analyzing a market and I would see an impulse rally on Wednesday -- "impulse" meaning trending action -- and then see an impulse selloff on Thursday. I couldn't understand it. How could the market show such conviction two days in a row, yet move in opposite directions, with no marked change in the macroeconomics?
It wasn't until I understood how different traders operated on different time frames that I grasped how price action like this could unfold in such a regular fashion. That confusing price behavior also dovetailed with one of the first things I was told on the trading floor so many years ago, which was, "Lose your opinion, not your money."
I finally started to get a handle on the different time frames after going over my trades with my mentor. I would record a losing trade, and in going over it with him, he would say, "Didn't you see the trend on the 60-minute chart?" or "I see the trigger you took on the 15-minute chart because of the trend on the 60-minute, but couldn't you see the trend on the four-hour chart?"
He taught me plenty about effective market indicators and measurements such as trendlines and pivot points, and the importance of the moving average convergence/divergence (Macd) and divergence, but I still struggled with all the time frames to trade from -- something he seemed to manage intuitively. I also realized I needed to learn how to be patient, to wait for the different time frames to line up.
When I first grasped that a trade could be a countertrend on a shorter time frame and a trend trade on a longer time frame, I vacillated between confusion and "eureka!" Shortly thereafter, I came up with the directional ratio, which put all the moving pieces in place.
UP, DOWN, OR SIDEWAYS?
There are three things a market can do: go up, go down, or go sideways. And there are three different time frames it can do it with: short term, intermediate term, and long term. That's nine directional determinates, or a directional ratio that when tabulated can help define trend trade setups versus countertrend setups.
...Continued in the October issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the October 2008 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2008, Technical Analysis, Inc.
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