As new traders come into our DailyFX Trading Course, one of the big questions we are asked is what to do first when looking for a trade.
Typically we see new traders open up a short-term chart like the 5-minute or 15-minute, place as many indicators as possible on that chart and wonder what they should do next. We recommend taking a step back to get a good feel for the mood of the market and then to look for your trade. What we mean by that is to first start with a daily chart with one year of trading to identify the direction of the trend. If the market is trading between two similar price levels, then the market is range bound and we want to buy above support and sell below resistance. If the market is in an uptrend, we want to buy the pullbacks off of the highs down to support. If the market is in a downtrend, we want to sell the rallies up to a resistance level. We would prefer that all new traders use the daily chart to both identify the trend and to find a trading opportunity. However, there are many times when no trades are setting up on the daily chart. So, at that time we recommend moving down to the 4-hour chart to find your trade, but always in the direction of the daily trend. If there are no setups on the 4-hour chart, you can then move down to the hourly chart to find a trade, but still only in the direction of the daily trend. This keeps you on the momentum side of the market and puts you in a position to be in on some of the big moves that the FX markets are known for. Most likely, you will find that the best trades are found on the daily charts and as the time frame shortens, the trades become less reliable. However, you will find many more trading opportunities on the hourly chart than on the daily chart. But if you always trade with the trend on the daily chart, you increase your chance of success and should be able to find plenty of quality setups.
Written by Dailyfx.com