Online Trading Academy Article of the Week
by Rick Wright, Online Trading Academy
Hello traders! In every Online Trading Academy class that I teach, the topic of trading styles is covered. By trading styles we usually mean long term, swing, or short term/daytrading. The main difference between these styles is the time frame we expect to hold on to our trades. This newsletter will explain why I prefer swing trading to the other styles.
If you are a long term (sometimes called position) trader, we expect that you will be in trades for several days to several weeks at a time. You are probably looking at weekly, daily, and perhaps four hour charts. In our multiple time frame discussions, we generally like to use the long term chart for our trend direction, the middle time frame for our supply and demand zones, and our smallest time frame is used to time our entry. With this style, holding for several days or weeks is certainly possible. My two main “problems” with this style is 1. You will probably hold over the weekend, when our gaps can occur-and sometimes these gaps are huge! And 2. The retracements. I’m not a huge fan of letting a trade I am watching retrace against me a hundred pips or more until the primary trend re-establishes itself.
If you are a short term/daytrader, you may be watching a one hour, fifteen minute, and a three minute chart. There are a couple of problems with this style in the spot forex market. The main issue is the de-centralized market we have. What that means is that there isn’t one computer server where all the quotes are reported, and everyone then sees the same charting information. With the spot market, the charts you see are your broker’s charts. A one pip breakout on your broker’s charts might not be a breakout anywhere else. This can cause many fake breakouts on your short term charts. In every class, I strongly recommend against taking any breakout trades for that main reason. Also, if a currency pair breaks out to the upside, in my opinion the pair has become too expensive to buy. And on the other side of the coin, a breakout to the downside translates into something that is too cheap for me to sell. I must wait for a pull back to demand to enter a long trade, and a retracement back to supply to enter a short trade. In the following chart, the EURUSD broke out to the upside for a few pips, then quickly retraced back to a small demand zone. My recommended entry is to not buy expensive, but to wait for the retracement to demand, where it is then cheap enough to buy. Yes, you will miss a few trades trading this conservatively, but you will also not take a lot of unnecessary losing trades as many breakout trades don’t work-again, because of the information we get in this de-centralized market.
The other main reason I recommend against short term trading is the fact that the vast majority of spot forex brokers don’t allow us to buy on the bid and sell on the ask. In the futures market and even the stock market, if I place a limit order to buy while the product is quoted at 1.25 to 1.26, (bid to ask), even if the prices don’t move and enough volume is traded I will get filled on my buy order, at the cheaper price. When the order is filled, I will be charged a commission by my broker. Since most spot forex brokers don’t charge any commission, if they allowed this trade to happen they wouldn’t earn any money on my trades. Believe it or not, I want my brokers to earn a living. This way I can continue to trade! In my opinion, short term trading is ideal in the futures markets, as everyone should be seeing the same prices because of the centralized market, and I am able to buy on the bid and sell on the ask. If short term trading is your preferred method of trading, the futures market is probably where you would want to do it.
Another significant reason I prefer swing trading is the time frames I watch. My main chart is the four hour. In the following chart, the GBPUSD gave us two obvious trades between the marked demand and supply zones.
Perhaps I am biased, but it seems to me that the larger time frames have cleaner levels. To me this means that the levels are easier to identify, and they seem to hold more often. This should transfer into a better win/loss ratio in your trading.
Yet another great reason to trade from larger time frames is the fact that you don’t have to babysit/manage your trades nearly as often. Sometimes I like to do other things besides staring at charts! When trading from the four hour chart, I only need to check/manage my trades every few candles. That is, about every eight to 12 hours! This way I can do many other things with my life – walk the dogs, clean the house, play some golf, etc. etc.
The last great reason we’ll discuss to trade from larger time frames is the fact that you can enter orders at any time of the day, letting you trade whenever you have time. If you want to be a short term trader, most often you are focusing on the more volatile times of the day – specifically the London and New York opens. This might translate to very early in the morning for you when you would rather be sleeping or even getting ready to go to your day job. By setting limit orders near the higher time frame zones, those orders can be placed any time of the day.
So the bottom line is this: when trading from the larger time frames, I should get into better trades, get more free time for doing other things, and be able to tailor the markets to me instead of me to the markets. I hope these reasons are good enough for you!
