Forex Trading: Grey Areas in Trading Methodologies

Filed under: Learn Forex Trading |

Screen shot 2013-01-17 at 10.30.13Even though you may have developed a trading methodology with a strict set of rules and parameters, there are sometimes grey areas that you had not considered, and a trading call has to be made. I came across one such grey area today in one of my live trade reviews (the one on the GBP/USD pair), and I had to make a call (which I unfortunately got wrong). But even if you get these calls wrong, you should still learn something and thus, be able to tweak your methodology or system for the better.

 

For me, my problem was that what the chart was telling me on the 4-hour timeframe was not exactly the same as it was telling me on the daily chart. The 4-hour chart was telling me that price had broken through a significant area of support/resistance to the down side, and more importantly, price had closed below that level; so when that happened and a bearish pin bar formed penetrating this level, I opted to take a short trade. However, on the daily chart, price had not yet closed below the important level of support/resistance, and as it turned out, at the close of the candle, it could not get below the support/resistance level and our stop loss was subsequently hit.

 

What we can glean from all of this is that the support/resistance levels on the higher timeframe charts are more important than the levels on the lower timeframe charts. In this example, the daily level of support/resistance proved to be stronger and more relevant than the level on the 4-hour timeframe. As such, we must use the higher timeframe charts as a guide when trading off of the lower timeframe charts, and to use this information to our advantage. The general rule must be that the higher timeframe charts are more relevant than the lower timeframe charts, and we must trade with this in mind.

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