Posted 15th February 2017
In today’s article I want to pass on a simple idea that can help you trade better.
It’s nothing complex and to some readers it will be old news. But it’s solid trading wisdom that’s worth going over again.
And for newer traders, it’s something you can take and use – right now – to improve your trading.
I want to talk about context. In trading, context can be really important.
New traders often get caught up with the ins and outs of the trading system they’re trying to implement. And in the process, they ignore price action.
But understanding where you are on the chart in the context of overall price action is really important.
I’ll show you what I mean with a few charts of the FTSE 100 index.
We talk a lot about trends here at Profit Watch. And I far prefer trading in the direction of the trend.
So for most trades I look to do, the first step is to find which way the trend is.
Identifying a trend will help your trading dramatically.
But if you can take the next step and put the current price action into context, you will increase your strike rate instantly.
Take a look at this first chart – it shows a clear downtrend on the 1-Hour chart of the FTSE…
And you might be thinking, “Great we have a clear downtrend, let’s look to sell”. Right idea, but let’s get some perspective.
Here’s the 4-hour chart of the FTSE that includes that same section as we saw on the hourly…
Does the big downtrend on the 1-Hour chart look as prominent when we zoom out to the 4-Hour chart?
To me, price action has moved down, but on the 4-Hour chart, the price appears to be in consolidation mode. The same kind of sideways price action we looked at here.
And now let’s zoom out a little further and look at the daily timeframe. The small blue box is roughly the area we looked at on that first hourly chart…
Clearly the big downtrend we saw in the 1-Hour chart is simply a minor pullback in the bigger FTSE uptrend.
This is a prime example of why it is important to put price into context.
And of course, it all depends on your trading style. For those traders shorting this move and able to watch the charts closely, they could profit a little if they get their entry exactly right, and take profit at the lows.
But the longer, more powerful uptrend soon came in and shorts would have been stopped out.
By putting the price into perspective, you would have ignored that decline on the hourly chart, and instead would be waiting patiently for the longer-term up trend to resume! That would be the time to be buying as mistimed shorts are getting stopped out.
So even when you see a great looking chart on a lower timeframe, remember to zoom out to the higher timeframe so you can put price action into context.
It should help you catch those bigger trends – and stay with them – far more effectively.
Of course, this won’t necessarily apply to every set-up. Sometimes you’re playing a break-out or a particular candlestick pattern and for those kinds of trades specific rules will apply.
I respect your privacy and will never pass on your email address to anyone else. As this is a free e-letter you may occasionally get some carefully selected advertising messages.
by Max Munroe
Posted March 14, 2013
by Ben Traynor
Posted February 21, 2017