As hinted in the previous chapter, you need to see the big picture. Seeing the big picture will help you identify the general trend, but may not be enough.
Is your system based on using 1 hour charts? That’s not too bad. But how about testing it on a wider timeframe of 2 hour charts? 4 hour charts, or more? In many cases, back testing your strategy on a higher time frame can prove to be more profitable.
You can trade with the trend, perform a perfect analysis and have your trade go in your favor. But, suddenly some exporter threw a big order into the markets and a sudden spike triggers your stop loss order.
This also applies for rumors. Market rumors are common and commonly untrue. Some big market participants create rumors for their own short term interests, and you are thrown out of the trade. A low time frame system means that you don’t have time to analyze these rumors.
Zoom out to the higher time frame and there’s no noise there.
Spread and execution
In lower time frames, the number of pips in your system is smaller: this means that if the spread might be too high for your nice theory. It can make the difference between a successful trade and a losing one. Using higher time frames, spreads are not an issue. A difference of a pip or two in spreads is almost meaningless when the scope of the trade is large.
Execution: this is an important point when choosing a broker, a point that will be discussed later on, but is relevant also now. With low time frames, you rely on your broker to execute your order as is: what you see is what you get. You also rely on the broker to execute the stop loss and take profit orders with a higher degree of precision. What happens on a re-quote? You miss your opportunity.
Similar with spreads, even a slow or sloppy execution by your broker doesn’t alter the basic logic of your trade and doesn’t make the difference between a losing and a winning trade.
What if you can’t find a nice setup for your system on a higher timeframe? If you still want to stick to it, perhaps another currency pair can be a better match for your system at a higher time frame.
And perhaps it is time to consider another forex system. Forex systems don’t work all the time anyway.
This is the third chapter of 9-chapter series about trading forex responsibly. This guide touches the key points of trading forex more responsibly and provides many practical tips that only help avoiding the pitfalls but also provide tools for balanced, successful and sustainable trading.
The whole series is available as an eBook which you can download by joining the newsletter at the bottom of each article on the site.
All the chapters in the series:
- Chapter 1: Money Management
- Chapter 2: Trade with the Trend
- Chapter 3: Use Higher Time Frames
- Chapter 4: Trade With a Registered Broker
- Chapter 5: Execution is Everything
- Chapter 6: Account Size Does Matter
- Chapter 7: Pacing
- Chapter 8: Learn How to Lose
- Chapter 9: Use More Predictable Currency Pairs