Monthly Archives: May 2010

Are Short Timeframes Just Noise?

Are Short Timeframes Just Noise? (And Other Scalping Feedback)

Thanks to everyone who provided feedback on the Scalping article last week – http://yourtradingcoach.com/trading-process-and-strategy/scalping/

It appears this is a market approach that interests quite a few people. Expect to hear more in future. For those of you not interested though, do not despair. There will be lots of other content. And the concepts will often apply to larger timeframes as well.

Today though, let’s address a couple of the key points discussed via email feedback during the last week.

(1) Ensure Liquidity

These strategies absolutely must be executed only in liquid markets. You need to have the confidence that you’ll get into or out of the market at, or close to, the planned price. Essentially, you’re looking to ensure that the market still provides smooth price action. If the chart is filled with stop-and-go price action, or gaps all over the place, avoid it or stick to higher timeframe trading. If the market results in too much adverse slippage, find another market.

I’ll be sticking to the emini indices and the fx futures, during their peak volume periods only.

(2) Minimize Costs

Costs MUST be minimized or you’ll bleed your account to death. As I said above, I’ll be sticking to the emini futures and the fx futures. I don’t plan to attempt this on spot forex at all. That being said, ForexBird seems to scalp the spot forex EUR/USD and EUR/JPY contracts quite successfully.

If you want to try it on spot forex, test on a demo platform first. But I’d be limiting scalping to pairs with 2 pips or less spread, possibly 3 as an absolute maximum for some of the larger range pairs such as GBP/USD.

(Actually, that’s good advice regardless of the chosen market – practice and prove success on a demo first.)

(3) Bias is dangerous

Great comment from a reader. I absolutely agree – but only when the trader is unwilling to change their bias.

While I believe you need to have some view of future market direction, you must be absolutely ready and willing to dump that bias as soon as new information comes to light that opposes your view.

Success on these timeframes is about reacting to what the market is showing you. Be prepared. Be focused. And be flexible. If you’re not willing to be proven wrong, you don’t belong in this timeframe (actually, you don’t yet belong in the markets, full stop!)

(4) Are Short Timeframes Just Noise?

Thanks to those who tried to tell me that short timeframes are just random noise, so scalping just won’t work. Love it! I appreciate your concern. 🙂

Seriously, this is a common view that I read all over the internet – "short term price action is just all random noise".

Traders who operate on daily charts believe that hourly charts are just noise and contain no edge. Hourly chart traders believe that the 5 minute chart is noise. 5 minute chart traders believe that the 1 minute chart is noise. And on and on.

Rubbish!

The reality is that they just can’t read it.

There is no noise – it’s all information.

Once again this will be best demonstrated by showing charts. Let’s look at a couple of trade opportunities from the last week, using standard price action based setups. All charts are 10 second charts. As you’ll see, THE SAME SUPPLY AND DEMAND PRINCIPLES WORK.

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Scalping

I’ve been following a great blog (http://forexbird.blogspot.com/) for a couple of months now and it’s inspired me to spend a week or two playing with a reduction in trading timeframe.

And I have to say that while trading is without doubt a serious business, I haven’t had so much FUN in years.

Despite his excellent performance, the strategy used by the ForexBird trader doesn’t appeal to me personally; in particular jumping on momentum moves. But I’ve found my normal approach adapts quite nicely to the lower timeframes.

My ‘normal’ trading involves what many already consider to be small timeframes, as follows:

  • 60 or 30 min chart – used to define an S/R structure to the market
  • 5 or 3 min chart – used to define the market environment and the trend which exists within the higher timeframe structure, and to develop a feel for bias
  • 1 min chart – used to fine-tune my analysis and bias and to work my entries and exits

For the last few nights, I’ve been operating on slightly quicker charts:

  • 3 min chart – used to define an S/R structure to the market
  • 1 min chart – used to define the market environment and the trend which exists within the higher timeframe structure, and to develop a feel for bias
  • 10 sec chart – used to fine-tune my analysis and bias and to work my entries and exits

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Support Becomes Resistance – A Trade Example

Once broken, key areas of support will often act as resistance. Vice versa for key areas of resistance, which when broken will become future support. Let’s look at an example, of support becoming resistance. The beauty of this example is that it’s a challenging one from a trade management perspective (especially for people like me who actively manage their positions), so there’s a lot to consider in this example.

The chart below is a recent 3 min GBP/USD chart showing support (created by earlier price action) tested again at A and B, before breaking at point C. Previous support now becomes potential resistance, as price rallies up to point D.

 

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Panic – 6 May 2010

Volatility has returned – big time!

I assume you’ve seen the results of the session on the news. But if you missed it, here’s the daily chart of the DJIA (Dow Jones Industrial Average) showing the drop which at one point had fallen just under 1000pts (previous close 10,868; today’s low 9,869.62):

 

 

Impressive stuff!

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