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 5 OF MYTHS ABOUT THE DAILY TIME FRAME

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PostSubject: 5 OF MYTHS ABOUT THE DAILY TIME FRAME   Tue Mar 17, 2015 2:43 pm

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Let’s face it: most people are struggling with their trading. We’ve all been there, blown accounts, gotten upset over failing, and been left wondering where it all went wrong. As you replay events over and over in your head, you eventually ponder to yourself, “What time frame is going to work best for me?”

Rest assured, you’re not alone. This is a question a lot of traders are looking to get closure on. If you’ve spent some time checking out the popular Forex forums, you would have noticed that most traders gravitate towards scalping or day trading. You probably thought, “Well if everyone else is doing it, it must be the way to go, right”? Nine times out of ten, traders are banging their heads in frustration because they’ve ‘followed the herd’, and ended up using deadly high frequency trading strategies on the low time frames.

MYTH #1 – THE DAILY TIME FRAME IS TOO EXPENSIVE TO TRADE

The first suggestion I make to troubled traders is to try to make all their trading decisions from the daily time frame. The most common response I receive back is, “How can you expect me to trade the daily time frame when I have such a small account?” Too many traders believe they are restricted to short time frames because of their account size.

The belief that the daily time frame is too expensive to trade flows from the idea – the wider your stop loss, the more expensive the risk. It’s true your stop loss will be wider when you trade with trade signals on the daily time frame, but it doesn’t mean you have to risk any more money than you want to.

MYTH #2 – HIGHER TIME FRAMES ARE NOT AS PROFITABLE

The majority of traders, especially the newbies, are so focused on short term charts, because they have no concept of what trading is really about. Many traders believe if you put in the hours, you will get the returns. Why do people see it this way? Think about it like this, if you put in the extra overtime at your day job, and your boss is nice enough, you will generally be rewarded for your extra enthusiasm and efforts. It’s crucial you don’t make the mistake of trying to integrate real-life logic into the market, they are a dangerous mix.

The lower time frames will generate more signals, but they are much lower in quality. While working in an environment like the 5, 15 and 30 minute charts, you’re basically trading ‘market noise’. Granted, the longer time frames won’t roll out trade setups at such a high pace. But, the signals that are generated on the daily time frame are much more reliable, and have a much better chance of working out.

It’s a no brainer, the daily time frame offers more clarity by providing the ‘bigger picture’: It’s much easier to identify the core price movements, and while peering into the market psychology. Signals on the daily time frame contain more value as good trading opportunities, because they contain more price data within the signal. A signal on the 15 minute chart contains a fraction of the data compared to the daily chart, therefore making it less reliable.

Signals on the daily time frame generate good follow through with price movement, allowing for a better chance to hit a 1:3 risk reward on your trade. A trade setup on the 15 minute chart is at high risk of being destroyed from the normal day to day volatility.

MYTH #3 – THE LONGER YOU’RE IN A POSITION THE HIGHER THE RISK

There are traders that will push the idea of being ‘in and out’ of the market, claiming it is less risky than holding positions on a longer term. This is built on some bad logic, it generally goes something like this…

When you enter and exit the market really quickly, you won’t be in danger of being stopped out if the market reverses on you.

Think about it, you’re always going to be at risk of being stopped out from an unexpected market event, no matter what strategy you use. The funny thing is, you’re more likely to be stopped out by some intra-day volatility when you take low time frame setups, and use stop losses that are tighter than a bee’s backside.

The daily chart filters out this intra-day noise, and provides you with more reliable data. Most daily time frame setups are unaffected by the intra-day volatility that knocks the scalpers around. You’ve instantly gained more of an edge just by working with daily time frame.

MYTH #4 – POSITIONS ARE DANGEROUS TO HOLD OVERNIGHT

This statement is typical of a day trader’s mentality: “You’ve got to close your position by the end of the day”. The Forex market is open for 24 hours, 5 days a week. It is fair to say that holding positions over the weekend can be a little risky due to unexpected weekend gaps, that’s a completely different topic. There is no benefit to closing your trades at the end of the day in a continuous market.

In fact, you could actually be shooting yourself in the foot by closing off your trades early in this fashion. It’s not uncommon for trades to take one or two days before you see the ‘breakout’ from the setup. Have a look at the example trade setup shown below, a bearish rejection candle on the daily time frame…

This is a good example of why we need to be patient and let the market do what it needs to do. Closing before the end of the day would have ensured you were left standing behind, regretting a lost opportunity.

I know it would be great if you could enter a trade, then price shoots off and hits your target straight away like a cannonball. The reality is, some trades may dip into the negative one or two times before maturing into profit. You need to let your trades have a chance and give the market the opportunity to do its thing.

MYTH #5 – PRICE MOVEMENTS ON THE DAILY TIME FRAME ARE HARD TO PREDICT

This rumor branches from the everlasting argument of technical vs. fundamental analysis. Most traders believe technical trading is only effective for the lower charts, and a good understanding of fundamental analysis is needed for the daily time frame. Some enforce the idea that you need to be good with economics to follow long term movements.

Technical analysis works on the daily chart, in fact it works better on the daily chart because the daily time frame provides more reliable data. The noise generated on the lower time frames will distort your technical analysis and usher you into false signals.

Thanks to the clarity the daily chart brings to your screen, good trading opportunities are very easy to identify. The real struggle for you, the trader, is to shift your focus towards less intense trading. Large gains that are up for grabs on the daily time frame can work to change a struggling intra-day scalper into a calm swing trader.

The examples of the price action signals above are good examples of how easy it can be to anticipate future price movements using simple technical trading signals. Myself and many of the other War Room traders jumped on board both of these price action setups. The simplicity of these types of setups are one of the major benefits of price action.

It’s time to stop chasing ghosts on the 15 minute chart and start trading the right way. Just by switching over to the daily time frame, you’re making necessary corrections to begin paving the way to trading success.

I hope you found this article useful and can now see how beneficial making the switch to the larger time frames can be. Why not tell your friends about it too by clicking one of the buttons below? They’ll thank you for it… trust me!

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5 OF MYTHS ABOUT THE DAILY TIME FRAME

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