How to Manage Forex Trades Using ‘Key' Time Frames
For price action traders the most important piece of equipment they have is their price action charts and the raw price data on those charts.
Using this price action information the confusion begins when a trader starts to think about what timeframes they should hunt trades on, look for profit and then manage those trades. Should we use the same time frame to manage trades that the trade was found on, or move to higher / smaller time frame?
Some of the most common questions and points of confusions that crop up from this price action data are;
#1: When a trader finds a signal to enter a trade, do they play the signal on that same timeframe chart they spotted the signal, or do they move down to a smaller timeframe chart to make a smaller stop?
#2: Once a trader has entered a trade should they then manage the trade on the timeframe they placed the trade on, or should they move down to a smaller timeframe chart?
#3: Should traders mark their support and resistance levels on the daily timeframe chart and then use these same levels on smaller timeframe charts to find trades on? And if this is okay to do, why it this different than managing trades on a smaller timeframe chart?
1: After Spotting a Trade, Do Traders Move to a Smaller Timeframe to Work Out Stops?
We all want the biggest risk reward trades we can possibly get out of each trade and it is this drive that will sometimes drive traders over the edge to moving down timeframes to shorten stops.
When a trader sees a trade on their chart they will often then think they can “outsmart” the market by moving down the timeframes to enter the signal, but with a smaller stop by using the smaller timeframes price action.
An example of this is; the daily chart produces a large bearish pin bar. Instead of just entering at the break of the pin bar low and setting the stop above the high on the daily chart, the trader may try to get a smaller stop by going to a smaller chart such as the 1hr chart and using the 1hr charts price action to find their stop.
This way, they can then have a smaller stop then what they would have than if they just used the pin bar high on the daily chart.
This is a MAJOR NO, NO!
Not only does it create analysis paralysis, but it simply does not give your trades enough time to do what they need to do to work out. We all want the biggest risk reward per trade we can, but there is a fine line where it steps over high probability trading into high risk trading.
What normally ends up happening is the trader will end up getting stopped out because they have not give their trade enough room to breathe and they watch that trade go on to be a solid winning trade without them on board knowing that if they have of used the daily chart as their stop, they would now be caching in their profits!
Rule #1: I always work out my stops on the same timeframe I place my trade on.
2: After a Trade is Entered, is The Trade Managed on The Same Timeframe or Smaller Timeframe?
A very common trade management mistake I see being made by traders is being stopped out of their trade too early when they shouldn't have been. T
his is a very common occurrence and it regularly occurs because the trader moved down to a smaller timeframe chart than the one they played the trade on and they have then been spooked. Rather than stick to the same timeframe chart they played their trade on and stick to their plan, the trader will often drop down to lower timeframes thinking this is a smart trade management plan.
What often really happens though is the trader will open the trade on the higher timeframe using that timeframes key support and resistance levels.
The trader will use that timeframes levels and price action to work out the trade’s stops and positions size. If the trader places the trade and moves to lower timeframes to manage their trade they will begin to see levels of support and resistance that they did not see or notice on the chart they placed their trade.
These lower timeframe support and resistance levels are less important and there are a lot more of them.
The lower the timeframe trader goes the more support and resistance levels they are going to find and the more they are going to stress and overmanage their trades.
The other major mistake that is made when traders move down to lower timeframes to manage trades is when they look at the price action. The lower the timeframe chart, the less powerful the price action.
For example; an engulfing bar on the daily chart is more powerful than an engulfing bar on the 1hr chart. It is very common for traders to make a trade and then move to a smaller timeframe chart to look at the price action to manage their trade. This will often spook them and cause them to jump at shadows.
The best way to avoid this whole messy scenario is to set your trade management plan before entering your trade.
For example; before entering your trade work out your key targets and write them down in your trade plan. Once your are then in your trade it is then just a matter of price moving into your targets and you taking profit. You are then not looking at what price action is doing. You are just waiting for price to move into certain key levels.
Rule #2: I always manage my trades on the same timeframe I first placed them on.
3: It is Okay to Use Daily Levels to Trade Intraday Signals?
The best levels for price action traders to trade from are found on the daily charts. Traders should mark the key daily support and resistance levels and then use these same key levels to hunt for trades on their intraday charts such as the 4hr and 8hr timeframes.
This trading process is explained in-depth here: Support and Resistance Tutorial
The reason this is okay to go down to lower timeframes where as the first two examples are both big no, no’s is because in this scenario we are still trading from a key daily level.
When we are trading on the intraday charts with the daily level, we are still trading from a key daily level.
In the first two examples we are moving down into intraday charts and using intraday levels or intraday price action to trade when we have originally traded a higher timeframe trade.
Rule #3: I hunt trades from major daily support or resistance levels.
I have written this article because this topic is a point of confusion for a lot of price action traders. Traders are often trying to outsmart the market by moving down to smaller timeframes to manage their trades.
All this tends to create is trades that are stopped out when they shouldn't be and profit taken too early because traders are spooked at price action from smaller timeframe charts.
There are three main trading rules I want traders to take out of this tutorial which are;
- You should be hunting trades from key daily marked levels.
- Your stops should be worked out on the same timeframe chart you are placing your trade
- You should ALWAYS manage trades from the same timeframe you placed your trade.
I hope you have enjoyed this article and can implement these strategies into your trading. Keep your trading simple and high probability.
Stick to trading the best setups and remain a picky A+ trader rather than the trader that must trade everything. If you still have any questions about anything at all you can post them in the comments below.
Safe trading and all the success,