Trading What I See

Today was a good example of why watching a longer timeframe is a good idea. It’s not to make entries, but to observe the context for setups on your trading chart. Tuesday I showed the way a longer chart can influence your trade timing in a negative way. This example shows how they can save you money.

The first 3-minute bar broke through yesterday’s high, and although price turned down within the 127% - 161.8% danger zone, the move looked pretty strong. The pullback stopped right at the .618 retracement just as the Stochastic hit the oversold area, and price was still above my longer-term moving average. A good setup. So why did I pass the trade?

Because on the 15-minute chart, that break above and then below yesterday’s high produced a Trader Vic 2B SETUP (see example.) The 2B occurs at trend reversals — in this case from up to down. My good setup is now in the wrong direction, and as you can see, taking it would have been a mistake. Instead I started looking for an opportunity to join the new downtrend and found two before lunch.

Someone asked me today whether using longer timeframes meant trading in the direction of the longer term chart. Not always. The trend is going to change first on the shorter timeframe, so the goal is to understand how your chart fits into the larger picture. In today’s situation the 15-minute chart showed an uptrend, but the pattern told me that below the surface the direction had probably changed to down. Even if this trade had worked out well, for me passing was the right decision. Good trading is always a matter of assessing risk.