Forex Patterns and Probabilities: Trading Strategies for Trending and Range-Bound Markets

CHAPTER 8

Forex Multiple Time Frame Strategy

Keep in mind what was said in Chapter 6 about strategy development: Every strategy begins with a tendency.

One of the most dependable features of the forex market is its tendency to form trends in a variety of time frames. Forex trends can continue for weeks, months, or even years, and traders who align themselves with these trends improve their chances of success. Let’s look at some specific techniques to capitalize on this well-known forex market tendency.

Frequently when we trade, we may look at currency pair’s chart and receive contradictory signals from various indicators. Which signals should we follow, and which ones should we ignore? When we are in doubt, it’s helpful to look at the big picture, by moving to a longer time frame. Let’s assume for our example that we are placing trades based on the hourly chart:

• First, look to the longer-term chart, which is the daily chart in this example, to see if the currency pair is trending. There are several ways to do this; simply draw a trend line, or use an indicator that is designed to determine market trend. For instance, the average directional index (ADX) indicator could be used to determine if the market is trending. Or we could look to moving averages to determine if they’re in the “proper order” formation.

• Often, the trend will be obvious without the use of any trend lines or indicators. The best trends are the ones that are obvious, because other traders can see the trend and ...