Month: June 2020

The ultimate goal for any trader is to make a profit while trading. However, about 90% of active traders today are unsuccessful at the venture. That is why managing losses is critical to the success of any trader.

Now there are several reasons why traders frequently return losses from their trades. One of the standout causes is a flawed exit strategy. You may nail your entry into the market, but once you are unsure of when to sell, you lose control of your trade. This is where the stop-loss order helps save the day.

In essence, the stop-loss will lead to your exit from the trade once the market begins to move unfavorably to your strategy. It forms a crucial part of any exit strategy and goes a long way in guaranteeing steady returns against minimal losses.

While trading, it is essential that you protect your position and the stop-loss order is just the tool you need. So read on and discover this crucial trading tool.

What is a Stop-Loss Order

The stop-loss order is a type of market order that exits your trade once the market price satisfies the exit condition. Stop-loss orders are aptly named as they prevent your trade from accumulating additional losses as asset prices drop.

Usually, traders set orders as part of their exit strategy from the trade. For instance, if you buy an asset for $30 and set the stop-loss at $29.50, the order will activate at $29.50. therefore, you don’t run the risk of your asset’s value going below the $29.50 mark.

The stop-loss is designed to protect the trader from additional losses that arise when the market trend declines. Just like its name goes, this order stops losses from rising. The order will be valid until you decide to liquidate your position or cancel the order altogether.

So for part-time traders, you do not have to sit in front of your computer all day watching the price fluctuations. Moreover, this order monitors the market for you and protects your position while you go on with your routine activities.

The Significance of Stop-Loss Orders

Stop-loss orders were designed to protect traders from further loss-making in an unfavorable market environment. Once you have an exit strategy in place, you can rest easy knowing that in case of a drop in prices, your stop-loss has your position covered.

As such, trading becomes more effortless in the long run. With a stop-loss in place, you free yourself to engage in other activities or even trade some more. Having this order in place takes away the need to monitor market behavior constantly.

The stop-loss is automated and, unlike you, won’t tire after staring at the screen all day. Having a stop-loss on hand is merely convenient for active traders or those who are occupied in other matters.

Additionally, stop-loss orders eliminate some aspects of emotional trading. Trading and greed have long been interlinked. Today, there is an unhealthy number of people who believe trading is a sort of get0-rich-quick-scheme. Some people get rich overnight from trading; others achieve such wealth over time. Nevertheless, the vast majority make losses primarily because of greed.

A stop-loss helps traders manage their emotions while trading and, as a result, protect not just their position but also their investment. Before engaging a stop-loss, you first have to configure it at a logical market position. So as the market decline, once your asset attains the set price, the order terminates the trade, and you can liquidate your position.

On the flip side, without a stop-order, you wouldn’t know exactly when to exit the market. Chances are you are going to wait out the declining trend in the market hoping for favorable prices. However, this could prove costly since your position loses value day by day, and you will eventually be forced to concede at a loss.

Traders rarely ever trade without a stop-loss order. Since they come at no cost at all, make sure you have one in place. Think of the order as an insurance policy in which you determine the buyout clause without added costs.

Now different trading strategies work differently. Stop-loss orders are prevalent for those who buy intending to turn a profit from the asset in due course.

Others seek to establish their presence on the market by anticipating the long-term increase in a stock or other asset. Either way, a stop-loss order will work differently for various strategies. What is important is sticking to your trading strategy. The order guides you through the trading plan by discounting emotions while trading.

Trailing stop-loss?

The regular stop-loss orders are meant to protect you against accumulating losses. However, you can use the order to protect your profits from a trade in the form of a trailing stop-loss.

The trailing stop usually is fixed below the prevailing market price of an asset. The trailing stop will then lie above your entry price and further adjust as the price fluctuates. This fluctuation triggers once the cost equals or surpasses the level initially set.

Once the value of an asset appreciates, you potentially are making profits. However, this unrealized gain only comes into effect once you cash in. With a trailing stop, you can guarantee significant capital gains while protecting your profit.

For example, when you acquire assets worth $2 and their value shoots to $7, setting a trailing stop at $5 will protect your profits worth $3. So even if the price returns to the initial $2, you will still have made a tidy $3 from the trade.

At the same time, the stop-loss order is still active and will only activate once the trigger price is attained.

Limit orders

Another market order similar to stop-orders is the limit order. A stop-loss will usually go with the price nearest to your order. This is because they are designed to form part of your exit strategy.

On the other hand, limit orders operate with much precision. Once the stop-loss point is reached, limit orders will cause the trade to close at the limit price then sell or buy depending on the market price.

You can place a buy limit order when you want to buy at the limit price or lower and a sell limit for when you want to sell at the limit price or higher.

A ‘buy limit’ is placed below the current price. Once the price reaches this point or goes lower than this, you can buy into the market. The market then rises, and your asset’s value appreciates.

On the other hand, the ‘sell limit’ price lies above the current price. The value climbs up to this point and then falls. The sell limit points out when the time is right to sell before the market adjusts.

How to place your stop-loss

When placing your stop-loss, consider the market level your trading signal would need to be discredited. Before arriving at this logical level, give the market leeway while studying its trajectory in line with your trading strategy.

It is important not to set your stop-loss too high lest the market moves past it and with it, your money. Having control of your trading moves defines successful traders. The stop-loss order enables you to keep a tight hold of your account by mitigating against a market that moves out of sync with the initial plan.

Another consideration you have to make regarding your stop-loss placement is the general market conditions. A lot of people often discredit the market environment when using stop-loss orders and instead focus on the expected gains.

On the flip side, however, your trading signal should primarily dictate where the stop-loss should lie. Also, take into account the prevailing market conditions such as trading volume. As such, first define your stop-loss position, after which you can decide how large a position you would want to hold.

Most importantly, your stop-loss should mainly be deduced from logical analysis. Trading, under the influence of human emotion, is a futile endeavor. Greed shouldn’t dictate your stop-loss placement because you run the risk of significant loss-making.

Profit Targets

Nevertheless, once you define your stop-loss placement, you can then find a reasonable profit target in the form of a take-profit order.

Your exit from a trade usually marks the successful end of your interaction with the market. Typically, traders will exit the market once they have attained their goals. These may be in the form of set targets before entering the market.

In the case of profit, it is more sensible to sell once you have gathered a respectable profit. Waiting out for far too long in the hope of much larger profits is a move driven by greed. Since trading and emotions shouldn’t be mixed, you will eventually lose out once the market reverses.

Alternative Guidelines for Placing a Stop-Loss Order

Technical indicators are popular tools used when analyzing the market and deciding when to trade. Therefore, they go hand-in-hand with stop-loss orders, and some may function as the order itself. For indicators giving buy signals, a stop loss will lie where the index no longer produces those signals.

Volatility also comes into play when determining the appropriate stop-loss positioning. Market volatility affects trends in market prices. Highly volatile markets have equally varying prices and, as such, are difficult to predict.

Volatility indicators go a long way in determining the degree of price movement over time. As such, traders can set their stop-loss based on volatility outside the range of market fluctuations.

Shortcomings of Stop-Loss Orders

Stop-loss orders lend trading a form of automation as traders do not have to be glued in front of their screens, monitoring the price action in the market. However, their much sought-after mode of operation is also their undoing.

Stop-loss orders activate once the price arrives at the order point. The order won’t be able to recognize short-term fluctuations from long-term price changes. A minor flux in the market could, regardless activate the order and needlessly close the trade.

Stop-loss orders fare poorly in fast-moving markets. As stop-loss orders switch to market orders, they often attract prices that differ from the initial stop price. In rapid markets, prices fluctuate by the minute, and the resulting market order may bring in dismal returns once activated.

In the case of limit orders, you benefit from the guarantee that your trade will only activate once the limit price is reached. However, in most instances, this limit may never come to fruition. You will then be obliged to hold out in the market until prices become favorable.

Trading Plan and Stop-Loss Order

Your stop-loss order should form part of your exit strategy and, ultimately, your trading plan. As explained above, you ought to place your stop-loss at pre-defined points on your chart. Randomizing these points goes against the whole idea of having a trading plan and will eventually yield losses.

Think of your stop-loss placement as a strategic move and should be backed by a solid plan. Your trading plan will outline your entry and exit strategy as a part of your larger trading objective. How much money you stand to make is inconsequential when determining your stop-loss placement.

There is so much more to trading than merely realizing profits. Managing your losses protects your account from unnecessary shortfalls that emerge from the absence of a solid exit strategy.

As you learn the ropes around trading, you will, sooner or later, encounter losses. The key to ultimate success in trading is learning to keep these deficits at the minimum, and market orders like the stop-loss come in handy when mitigating against excessive losses for a deteriorating asset price.

A stop-loss order also works to protect your earnings from a deteriorating trade. In the case of a trailing stop-loss, you are sure that even if an appreciated price does fall, the profit you generated from its prior rise in value will still be on hand once you exit the trade.

So finally, stop-loss orders are crucial to trading success and since they do not come at a cost, traders are encouraged to make full use of them.

Technical analysis, as we know it today, is a vital part of forex trading. It is a standard market analysis tool popular with short-term traders. These are guys whose timeframes do not allow fundamental analyses hence the need to study the market trends via available data.

The frontrunners of technical analysis included one of the famous names in trading, Charles H. Dow. The Dow Theory was one of the original means of technical analysis. And although it wasn’t a foolproof trading tool, the Dow Theory set the stage for other market gurus to further develop technical analysis and grow it to the vital tool it has become today.

In its primary sense, technical analysis points to the study of how a market behaves. It doesn’t consider the items but rather the metrics involved such as price and volume of goods trade. This way, technical analysts can graphically come up with a representation of market behavior over time and eventually be able to predict future trends.

Technical analysis looks at the numbers surrounding trading assets. From this study, you should get a rough idea as to how much money is changing hands and the direction all of it is headed. Once you know the general market trajectory, you can buy into the market and ride the trend to profit.

History And Significance Of Technical Analysis In Trading

Technical analysis has been around since traders started taking records of market data. One of the primary data considered during any technical analysis procedure is the price of a commodity, currency, or stock.

Since prices vary over time, it became essential to note down when these prices became unfavorable and when the tides changed. As a result, record keeping became the pillar of technical analysis and until today, technical analysis relies heavily on historical data to forecast future market behavior.

Analyzing past market behavior helps traders understand and explain why a market behaves in a certain way. With a broader understanding of market dynamics, traders can predict future market trends and capitalize the same for profit.

Today, technical analysis has undergone hundreds of years’ worth of development to become the powerful tool it is today. However, the credit lies squarely with the frontrunners of technical analysis.

Founders Of Technical Analysis

Charles Dow

He is arguably the most prominent frontrunner of technical analysis methods in trading. The Dow Theory is one of Charles Dow’s notable works, and it was one of the first postulates to point out market trends and their overt influence in the market.

Alongside Edward Jones and Charles Bergstresser, they founded the Dow Jones & Company, a publishing firm most notable for its flagship publication, The Wall Street Journal, among several other financial books.

One of the company’s assets was Charles Dow himself, an established reporter at the time. He was famed for his ability to break down complex financial topics for the general public to digest.

Additionally, Charles Dow is also credited with the development of the Dow index, also known as the Dow Jones Industrial Average. The index gauges the performance of stocks of thirty listed companies in the US.

The Dow theory was by far the most critical contribution of Charles Dow into financial markets. As a reporter, he based his argument on the numerous financial editorials he penned at the time. Following his death in 1902, work on his theory continued unabated and this time William Hamilton was at the helm.

In his theory, Charles Dow posits how investors can gauge the stock market’s health and performance to get an idea of the business environment further. Unlike today, data was hard to come by and at most scanty and, you would be hard-pressed to identify market trends. Charles Dow was the first person to confirm trends in the market.

Because of the significant role played by market trends, the Dow theory holds water one hundred years since the passing of its founder.

Principles outlined in the Dow Theory

1.       The market discounts all news

The behavior of stock prices and other indices reflects the information available on that market. This principle also includes companies’ revenue reports, inflation, and expert opinions on the same. As such, you are better placed on studying price action as opposed to burdening yourself with balance sheets and revenue reports.

2.       There are three trends in the market

Since the Dow Theory was the first to point out the essence of market trends, it went on to further divide them into three classes:

·         Primary trend

This is the primary trend which you can see. In the current market setup, computers are widely used to plot market trends and as you glance at these images, you will be able to spot the prevailing market trend. A primary trend spans several years and as such, will show the long-term trajectory that the market follows.

·         Secondary trend

Secondary trends tend to follow opposing directions from the main course. They are considered modifications to the dominant price movement. Secondary trends do not last as long as the primary ones and could span a couple of weeks or even months. If the market has a primarily upward trend, then a bearish trajectory could be the secondary trend.

·         Minor trend

As its name goes, minor trends are mere fluctuations in the market. Smaller patterns oppose secondary trends and have a rather brief timeframe.

3.       Trends follow three phases

For a trend to form and distinguish itself, it usually goes through three stages. On the onset of developing a primary uptrend in a bullish setting, traders buy into the market against the prevailing market judgment. This is the accumulation phase.

As business improves, more buyers are drawn into the market. As the market outlook improves gradually, market prices go up. This forms the public participation phase.

The third and final phase is the panic phase. During this time, buyers are scrambling to get a piece of the pie, as it is evident that potential returns are promising. However, the final stage is mostly a speculative one for newer market entrants. For the original investors, it is the best time to cash-in on their profit and exit the scene.

4.       Indices confirm each other

All market indices need to be on the same page to confirm a prevailing trend. To cement your belief in a specific pattern, all markers need to point in one direction. Just as in the case of indicators, using only a single index gives flawed results hence the need to include several that agree with each other.

5.       Volume confirms the trends

Volumes are essential when describing the prevailing market trend. An upward trend is proven right only if there is a price increase as well as increased volume in the market. The opposite holds for downtrends.

6.       Trends will continue until conclusive signals suggest otherwise

Apparent reversals are hard to miss. Therefore, regardless of minor trends appearing, the primary trend holds. However, reversals do happen albeit for a brief time, then the primary trend resumes.

William P. Hamilton

Another proponent of the Dow Theory, William P. Hamilton, in his book, The Stock Market Barometer, provides further insight into technical analysis as Charles Dow imagined.

The Dow Theory is an all-time favorite when it comes to understanding market trends. Following in the footsteps of Charles Dow, Hamilton expounds on Dow’s postulates in the classic, The Stock Market Barometer. He offers a glimpse into the prevailing market at the time and, in the process, gives incredible insights as he observed in the market.

In a nutshell, William Hamilton used the three types of trends to confirm with a higher degree of accuracy, the prevailing bullish or bearish market inclination. As a result, he was able to predict the 1929 financial crash three days to D-day, and sadly, his death as well.

The late Hamilton, like Charles Dow, was a financial reporter and served as the fourth editor of The Wall Street Journal.

Robert Rhea

Another proponent of the Dow Theory, Robert Rhea, put Charles Dow’s postulates into action. He did so by coming up with a Dow Theory indicator that would guide traders in investing in the market.

Rhea was quite successful at implementing the Dow Theory in his market calls. In 1932, he predicted the market decline and, five years later, also foresaw the rise in 1937. Because of his success, Robert Rhea penned the investment classic about the popular theory, The Dow Theory.

Edson Gould

There are many ways you can make money while trading. As the frontrunners of technical analysis developed the tool widely used today in various markets, you would expect them to profit significantly from the same methods. However, in the case of Edson Gould, this wasn’t the case.

Gould was one of the earliest and most acclaimed market technicians of all time. His fame is mainly credited to his uncanny ability to predict the stock markets in issued reports accurately.

In 1922, Gould joined Moody’s Investor Service as an analyst intent on developing a way to predict stock market movement. With difficulty, he struggled to recognize significant trends in the stock market until finally stumbling upon what is now known as the ‘Gould-en rule.’

Gould’s analysis of the stock market was pretty far-reaching as he even considered Newton’s Laws among other Physics fundamentals. Financial data is often the go-to means for forecasting the stock market but, as Gould realized, held little sway when trying to predict actions in the short-term future.

Upon reading the French book, The Crowd, Gould realized how intertwined the stock market was with human psychology, more so considering the masses. Since crowd psychology is often harder to predict, using it to conclude, the market’s next move won’t yield any fruits.

Usually, an economy with plenty of money changing hands is prosperous and increase the chances of a bullish situation holding out. On the flip side, when people aren’t spending their money, the reverse holds as there are no more buyers in the market.

The only way you can make money in light of the influence of crowd psychology is to remove yourself from its sphere of influence. Investors are better placed when they focus their energies on proven strategies or companies with a proven track record of success.

‘Gould-standard’ companies are those that showcase strong earnings regularly. Others fall short of these rewards and as such, are considered hunks of lead.

Edson Gould often spoke of the stock market as one that reacts with great emotion. Following the crowd, psychology is a recipe for disaster, and there is little chance of generating long-term wealth.

Edson Gould is also notable for inventing Speed resistance lines. These are trendlines used to point out support and resistance areas in the market.

John Magee

The author of Technical Analysis of Stock Trends is well-known for his use of charts in trading. Moreover, John Magee’s book is considered the ‘bible’ of technical analysis, lending significant credence to his role in the development of technical analysis over time.

Charts are valuable tools used in trading, and Magee knew so. He drew charts for any type of data available. Trading volumes, stock prices, and averages were among the data sets used to generate graphs.

With the data presented graphically, Magee was then able to identify a wealth of shapes on the charts. Patterns, flags, weak triangles, shoulders, etc. were just some of the items John Magee was interested in when analyzing the data.

Magee is one of the most dedicated traders who relied solely on technical analysis to trade. What is surprising, however, Magee managed his portfolio on his emotions rather than reliable analysis. He, however, took care of his clients’ portfolios employing his analysis acumen.

The Takeaway

Charles Dow is primarily recognized for the Dow theory from which technical analysis as we know it was born. Several financial reporters and seasoned traders have contributed to expanding the scope of technical analysis with others developing critical technical indicators.

However, each of these founding fathers of lent valuable insight into technical analysis. The result is the modern technical analysis that enables all types of traders to reap from the market.

Technical analysis is a vital part of trading and is critical in several markets globally. It is often stated that history repeats itself and nowhere is this truer than on the trading floor.

Armed with the right data and tools to analyze the same, like John Magee, you will be able to tell apart trends and patterns in the market. As always, markets undergo alternating periods of both bullish and bearish inclinations.

Like Charles Dow and his companions in the trade, the onus is on you to identify these market trends as well as the timelines surrounding it all. Capitalize on them to be successful in the trading arena.

Trading is founded on the fluctuating prices of various trading commodities. In any market, the price action tends to vary over time as it shifts upward then rescinds this position at a later date.

This movement enables traders to capitalize on an option’s diminished value when they buy into the market. Further on, as the value rises, these items are offloaded, and the difference is what traders pocket as a profit.

Now no one really knows how to predict the future. Traders are similarly disadvantaged when it comes to forecasting. Nevertheless, there are financial tools that aid traders when it comes to making decisions concerning future price action in the market. Traders employ these tools often in their trading strategies.

The parabolic SAR is one such tool and is currently enjoying massive popularity among traders today. Coupled with moving averages, the SAR continues to enable traders to latch on to bullish and bearish signals thereby aiding their trading ventures.

What is parabolic Stop And Reverse (SAR)

The SAR indicator is a favorite among technical traders who are keen on price action. It allows traders to monitor price movements as well as deviating trends as they seek out reversals in the market.

Traders regularly address market trends pointing out their significance in trading. Typically, the prevailing price direction should help you figure out where the price of a commodity is heading. The price action determines patterns. When a reversal is about to take place, the price curve usually reacts to emulate the shifting pattern.

The SAR indicator was developed by renowned trading authority J. Welles Wilder responsible for other indicators like RSI. Initially referred to as the stop and reverse system, SAR is mainly intended to pick out likely reversals in price action.

On a price chart, the SAR indicator is seen as a series of dots that run alongside the price. The SAR’s position relative to the price is then used to deduce trading signals. To work effectively, traders typically apply the parabolic SAR in markets that exhibit a strong trend hence a favorite among trend traders.

How does the parabolic SAR work?

SAR is used to point out whether the market will move in a bearish or bullish direction depending on where it lies with respect to the price line. As a rule of thumb, when the dots pass above the price, you can expect a downward trend. This can then indicate that the market is ripe for selling.

The opposite holds when the dots appear just below the price. The price action is improving, and buying into the market would be an ideal decision to make.

As the price appreciates, the SAR series of dots move in tandem with it. Once the trend gathers steam and strengthens, so does SAR. Eventually, the dots ride through the price to emerge on the other side. During this time, you will encounter signals which, depending on the dots’ position, indicate whether to buy or sell

Since SAR is dependent on trending markets, it can be ineffective if a market is smooth sailing. When markets express heightened volatility, it is usually harder to point out the trend, and the SAR will not be of much use then.

Indicators used alongside parabolic SAR

The SAR indicator, as pointed by Wilder, shouldn’t be used solely to determine your trades. Varying levels of volatility characterize trading. This feature tends to distort the prevailing trend and makes the parabolic SAR inaccurate.

To be able to smoothen out the effect of volatile markets, make sure you have other indicators working in conjunction with SAR. Some of these useful indicators you should include in your strategy are highlighted below:

·         RSI

Wilder also developed the RSI which works well when paired with the SAR. RSI indicates the momentum of price action. How fast the price of an asset appreciates or depreciates points out its strength given the direction it follows.

While trading, upward and downward trends occur concurrently and at times, these movements may not indicate a proper pattern in the market. However, the RSI should be used to convince you whether a shift in the price bears any hope of prevailing. This way, you will be able to gauge the general market behavior and, alongside SAR, give solid buy or sell signals.

·         Moving average

The moving average indicator shows the average price of an asset when the market closes. It is applicable over a pre-determined period and is an excellent pointer when determining market momentum.

·         MACD

MACD connects two moving averages for a pair of asset prices. It showcases fluctuating price momentum between the pair. The averages often move independently, often converging, diverging and overlapping.

MACD uses a histogram to showcase either bearish or bullish indications. A positive value on the histogram is normally taken to mean a diminishing upward trend.

·         Average Directional Index (ADX)

Also developed by Welles Wilder, ADX works in tandem with both plus and minus Directional Indicators alias, DMI- and DMI+. The indicator measures momentum and is a useful tool when determining the strength of a trend.

ADX was initially meant for the commodities market since Wilder was also party to commodity trading. However, the indicator today cuts across various other markets like forex, stocks and ETFs.

·         Candlestick patterns

Candlesticks have been in use for centuries and are useful when predicting price direction. They are colorful vertical bars that are a great addition to your trading chart.

Candlesticks condense data from several timeframes into individual price bars. As opposed to traditional lines that use closing prices, candlesticks provide valuable information considering the wealth of information used to generate them.

Using the parabolic SAR indicator

In trending markets, it is fairly easy to predict price movements and decide when to trade. However, once you have determined a perfect entry point, you should then consider the exit strategy. The SAR can be used to point out when the market is about to reverse. At this point, you should sell and capitalize on the asset’s maximum value.

The parabolic SAR mainly uses dots that appear on a price chart. The position of these dots is then used to indicate bearish or bullish signals.

Besides trend trading, the parabolic SAR is also applicable in other ways as underlined below:

1.      As a stop-loss

One of the most widespread uses of parabolic is as a stop-loss. While trading, price drops tend to diminish your revenue, so you need to protect your position and your profits. Dealing with a trailing stop-loss works towards achieving this.

The parabolic SAR indicator is an actively shifting indicator. Most of the time, it is continually giving off trading signals. Set your trailing stop loss to match the indicator while the stock or asset price rises. This is a powerful indicator more so for day traders who wish to skip the traditional stop loss.

When shorting, the price decline is prominent, and including a parabolic SAR in your strategy helps protect your profits. The SAR decreases with downtrends and vice versa for upward moving trends. As SAR lies above the price, it eventually falls following the declining price.

2.      Detect your trading exit points

The parabolic SAR is a valuable tool that helps you determine whether to exit a trade or not. Your entry and exit strategies greatly define your profitability.

You need to enter the market when the price allows you to get the best value for money. On the other hand, a good exit strategy will enable you to cash in on a good uptrend.

You need to have optimum points for both exit and entry and hence the need to consider a parabolic SAR. Furthermore, what use is an excellent entry strategy when your exit point does not guarantee your projected returns.

3.      Works as a swing trading tool

The parabolic SAR indicator excels in markets with strong trends. As such, it is a reliable indicator when swing trading. When swing trading, you buy into the market then hold out for several days at a time. This gives you enough time to observe the prevailing trend and identify exit points on the price action.

Limitations of SAR indicator

One inhibiting factor in SAR is its dependence on trending markets. Once prices begin to move sideways, the indicator produces a lot of fake signals.

As there is no trend to follow, the parabolic SAR will simply follow the price around. As a trader, the signals will be present on your chart. However, these aren’t dependable indications of whether you can sell or not.

Traders mitigate this shortcoming by combining SAR with other indicators. Doing so clears out the noise and gives you reliable signals. Additionally, if you want to use the parabolic SAR, only consider it for trending markets.

Finally, it is essential to remember that the SAR indicator is always giving signals along the price line. It is up to the trader to determine the dominant trend direction and capitalize on it. To have a surefire trading strategy with SAR, make sure you have included other indicators such as moving averages to help to weed out weak trading signals.

Many traders wanting to get into the business are always uncertain about how much they need to trade. There is no definitive answer that guides you on exactly how much you need to kick start your trading journey.

Nevertheless, the amount of money you can make available for trading won’t define your success or failure. When it comes to trading, an understanding of the game is vital because even if you can invest several thousand dollars, if you are out of your league in the trading scene, you will probably lose all your capital.

So is it possible to start trading with $100 in the FX scene? The short answer is Yes. But it doesn’t just end at that. Before you can start trading with $100, there are several things that you need to consider first before getting on with trading that amount.

This article is going to break down how you can go about trading with $100. This capital is not significant, but it still is worth something. Moreover, with some discipline and trading insight, you can expand your trading portfolio with even $100. So read on to find out.

Selecting Your Market

As mentioned before, $100 is not a significantly large amount. Even so, do not disregard it since traders lose a lot more money trading. If you use a faulty strategy, then you might as well as forget about trading. If you fail at trading with small amounts, then the chances of you handling much more money are slim.

There are numerous trading options to invest your money in. But with only $100, you limit your options considerably. For starters, you need to set your sights on markets that satisfy your trading needs, even in the face of limited trading capital.

The forex market is your best bet when you have settled on trading a hundred dollars. Besides being the largest market in the world, the FX arena is also characterized by higher volatility all year round. These two features make it the best market for trading small amounts.

Things happen fast, and as a budding trader, you will quickly learn the ropes and even become a pro-trader in no time. You need to realize that trading is not just about multiplying your money in the shortest time possible.

Target higher gains when trading with $100, or else your account will grow sluggishly. Trillions of dollars change hands daily on the currency market. As such, there is a lot of money to be made here, and even you could be part of those making money with FX.

There are several currency pairs you can consider. However, remember to keep your charges as low as possible. To do this, opt for the most popular currency pairs. It will be significantly cheaper to trade common currencies when you consider the spread.

The popular currency pairs are traded much more frequently and by more people comparably. Furthermore, when these specific markets overlap during trading, their volatility increases significantly, and the chances of you making decent returns grow.

To succeed at it, you need to manage your risks and reduce your losses to manageable levels. Because making losses is inevitable, handling your risks is key to your overall success in FX trading.

Select Your FX broker

It is quite simple getting into the trading business. With just $100, you can get yourself a broker who allows the amount, open an account with them, and get started trading.

However, because you are dealing with a small amount, it will be wise to carefully vet whoever is handling your money to see if they meet specific requirements.

Characteristics of your Forex broker

1.       Minimum deposit

The first step to trading with $100 is finding a broker whose minimum capital requirements cover $100. This is relatively straightforward, but there are other qualities they will need to satisfy moving forward. Granted, it isn’t a vast sum but still counts as an investment either way.

2.       How much are the charges?

The size of your capital is visibly small, so you will want to keep ay charges on the lower side. Do this so that you won’t expend money on expenditures as opposed to actually trading.

For that reason, avoid commission-based brokers. These guys earn their keep through the number of trades they are involved in. Mostly, there is a set minimum fee, and once you engage in multiple moves, this fee is calculated repeatedly and you will end up paying them more.

Alternatively, brokers who charge their services on spread offer a reasonable alternative. While using the spread fee, your charges will be calculated based on the amount of money you use to trade. Therefore, you get a better deal operating with a spread as opposed to commissions.

3.       Leverage and margin

Price variations in the FX market tend to be insignificant. This is magnified when you consider the shorter timeframes, such as in day trading. Even if you consider a favorable 20% price shift after investing your money, the returns do not amount to much.

Since you are unable to increase your capital, the alternative would be to utilize trading on margin with leverage. These are trading tools that allow traders to make use of capital they do not have at the moment with a view of realizing much higher gains in the long run.

With leverage, you can control a much larger trading position. This feature allows you to capitalize on even the slightest price movement that the FX market is notorious for.

However, different global markets allow different leverage levels. In Wall Street, you can trade with a maximum leverage of 50:1 and 30:1 in the EU. Even so, you can still trade up to 400 times your initial capital across other global markets.

So when starting with small amounts like $100, leverage is essential. Try to remember, however, that you should set up a solid trading strategy since the rewards just got sweeter and the risk even more significant.

Define Your Trading Strategy

You need to have a comprehensive plan for trading with $100. As it is a small amount of money, you need to be extra careful how you spend. Any risky moves could sink your little investment.

That said, think through your trades, the entry and exit points, and the amount of money a single move will ride on. Additionally, risk management is vital if you are to avoid losses.

·         When should you trade with $100

As mentioned earlier, trading the currency markets is the way to go with just $100. This is because they are the most volatile and, in the case of day trading, guarantee short-term results. Remember, your bankroll is not large enough to afford the comfort of more substantial, low-risk, and ultimately long-term investment.

If you want to stretch your money even further, trade when the most popular FX currencies are on the move. This is usually when the US, EU, and UK markets are active. This should allow you to capitalize on the three most volatile currencies i.e., GBP, USD, and EUR.

So plan your trading activities for when the three markets overlap. During such a time, you can expect increased volatility levels from GBP/USD and EUR/USD pairs. With that comes an even better chance of reward.

·         How much per trade?

With a small starting capital, you need to be mindful of your spending. However, also consider the number of trades you shall make per day.

Do not attempt to score several trades. You will instead be multiplying your risk of losing money with such a strategy. On the flip side, however, engage in fewer moves but use significant portions of your capital in each trade.

As always, you are better off exposing yourself to a single risk than several smaller ones. Besides, if you have several trades open concurrently, the chances of you losing out increase. Using 60% of your bankroll for each trade is suitable for $100. Remember, do not have more than a single trade running at a time.

·         Entry and exit points

Having a strategy helps you to plan your trading procedures. As such, your plan should outline the conditions that are perfect for you to buy into the market. Typically, buying takes place when the prices are favorably low.

No one can give a definitive answer as to what the perfect price looks like, but indicators help traders identify points in the market that favor investing.

At this point, you must have access to trading charts. Trading charts allow you access to a wealth of technical indicators. These are the tools you should use to trade forex.

Since your timeframe is pretty slim, you will not have enough time to consider vital information concerning the market but only technical data. Hence the need to use technical indicators.

Momentum indicators help you figure out the rate of price change. This way, you can then decide on price action when the conditions for buying are ripe. Additionally, you can use volatility indicators, oscillators, chart patterns, and volume indicators to pick your entry points.

Once you have an active trade ongoing, the risk factor comes into play.

·         Managing the risks

In a normal situation, when your capital is sufficient enough to allow for larger trades, you should limit your trading to just 2% of what you have in the bank.

In this case, however, there is just %100 available to trade with. The capital is not significantly large and allows you to stomach much more substantial risks. Remember, you can only lose $100. And thus a 3% risk for every trade you make is suitable.

Earlier on, we highlighted the essence of taking advantage of a broader trading position with leverage. Going by the US standard of 1:50, you will be able to control $5,000 worth of currency with your $100. Following this, use the risk you intend to allow to find your stop-loss position.

·         Exit strategy

Because of the $100 limit, you may resolve to trade aggressively. Your trailing stop loss order should cover you, and as long as the market is favorable, your profits are secure.

A stop-loss order is one of the tools that will help you define your exit strategy. It should pinpoint where and when to exit the trade. While allowing a 3% risk, your stop-loss order will lie at 0.1% below the price you bought your currency’s entry price.

·         Success rate

Once you have noted the numbers, you may want to plot it and figure out whether you are moving in the right direction.

If you manage to attain a 30% success rate risking 3% in every trade, you are bound to generate just about a 7% profit after ten trades entered. Now a 7% growth is no small matter, and most traders struggle to achieve such success.

Nevertheless, you will need some strict adherence to this strategy allowing only a single trade at a time. With $100, you won’t be able to make as many trades as opposed to when you had much more money. Therefore, when conducting two trades daily, you will need 500 trading days to attain $80,000. Halfway through 500 days, and you can pocket $250.

You can, in theory, make a tidy profit out of $100. If you intend to follow this model, make sure to divide your projections into smaller bits as milestones. Once you achieve a milestone, re-evaluate your strategy. The main aim when doing business is to alleviate risk. Therefore, as you grow your portfolio, look for ways in which you can reduce the risk that you take on while trading.

Additionally, the more you earn, the more money you have to trade. However, reduce the portion that is actively trading. This way, you won’t be taking on significant risks as opposed to the earlier aggressive approach.

Start Trading

Once you have the strategy in place, preferably documented, you can then move on to trading. Selecting a broker is the first step. Brokers bridge the gap between you and the FX market. They facilitate your trades, and your $100 won’t mean much if you aren’t able to trade it.

Remember the criteria for selecting a broker and go with one who fits the bill, and after that, you may fund your account.

Day trading is hardly an easy job, more so for beginners. However, before you go live, test out your trading strategy and see if it makes sense. Amend it where necessary and after that proceed with trading.

Granted, $100 is not the optimum level of capital needed to trade. However, we all start from somewhere, and such an amount is perfect for someone who is out to learn the ropes. First, get acquainted with trading and as you grow your account, find ways to fine-tune your strategy as you seek to lower the risk involved.

For traders, knowing when to buy and sell a trading option is crucial to the profitability of the entire venture. The entry and exit points into a market are essential areas when trading activities take place.

Through technical analysis, traders can pinpoint precisely where and when certain price levels are projected to climb or drop further than their current position.

The idea of support and resistance is highly discussed in the trading world. Both concepts are vital in determining price levels whereby the value of an asset breaks from a trend and holds the position for some time.

Usually, the definition of support and resistance points to a reasonably straightforward trading concept. However, there is more to support and resistance (S&R) than what most online sources provide, more so when it comes to drawing the S&R zones.

The basics of support and resistance

Support defines the price level, whereby a downtrend halts for a while. This is usually because of the heightened buying of assets. Following any drop in the price of a stock, the demand for the same goes up as it is when you can get the best bang for your buck.

The support signals that this level could occur once again and block any further drop in price. Because of the concentration of buyers at support positions, prices of assets or stocks regularly reverse and rebound from the support zone.

On the other hand, resistance is seen on an upward trend. When the rising price halts, they usually have difficulty moving past the stagnated point. This barrier to a sustained increase in price is signal that a similar level could pop up and also act as an obstruction for price moving upward.

As buy orders are often focused at support points, so are sell orders concentrated at significant resistance zones. Also, sellers tend to leap into the market to offload their assets as prices climb towards crucial resistance levels.

To find out where S&R zones lie, technical analysis tools are available to use on trading charts. Such tools are chart patterns, channels, horizontal lines, trendlines, etc.

Trading on support and resistance

Support and resistance zones are vital areas where a lot of trading takes place. Buyers and sellers often train their focus when prices approach both resistance and support zones. This is because the rates favor both entry and exit into the market before the conditions reverse.

Trading on support and resistance is possible since once prices approach either zone, there is bound to be a reversal. Trading requires participants to have some proficiency when predicting future outcomes and S&R work along those lines.

Support and resistance zones are generally identified in prior timeframes owing to the behavior of an asset price. Therefore, traders can bear some confidence in trading these zones since price reversal had occurred earlier and will continue to take place.

There isn’t a uni-directional trading move at these zones. Some traders will open trades at a favorable price level as others exit the market when the price favors their decision.

Typically, the critical points along the price curve where S&R lie signify a bounce or break from the standard curve trajectory. When trading at support and resistance zones, the bounce and break points are where you train your focus.

Drawing S&R zones

Before you go about trading at S&R zones, you should first familiarize yourself with how they are created. Drawing S&R on a trading chart makes it easier to interpret and isolate the spot where you expect the price to follow a reversal. That is why it is the first step to follow when trading S&R zones.

When drawing S&R zones, consider longer timeframes. These harbor plenty of information and, as such, should give you a bigger picture of the market. Also, when you deliberate lengthier timelines, your S&R zones will focus on the primary reversal levels.

·         Step 1

The first step to drawing S&R zones is actually deciding on the type of chart you will use. Preferably go with what you are familiar as long as the price highs and lows are visible.

·         Step 2

Identify all maximum and minimum points that the price curve achieved. These highs and lows are critical items when drawing S&R zones. As mentioned before, make sure you consider an extended timeframe to have accurate data. Therefore, scroll back to as you increase the timeframe.

·         Step 3

Once you have identified these extreme points, constructing horizontal lines above them. The lines shouldn’t cross the curve but touch the limits of the price curve; highs and lows. If you check out your chart at this stage, you can quickly tell if the curve follows a trend or not.

After that, connect the peaks and lows using longer horizontal lines. With these lines, try and elongate those that touch two points on the curve and join them. Add as many lines as there are connecting.

Afterward, check for lines with multiple points on which they connect with the price curve at the extremes. This is pretty easy to spot.

Doing so should allow you to see whether the line supported the price previously. The number of these connected spots point to the strength of support and the possibility of the same trend repeating in the future. The reverse is true for resistance levels.

Trends in trading usually follow a historical pattern, and history normally repeats itself. So where a line connects several support zones, chances are the same support zone will be present because it has occurred in the past.

Characteristics of S&R

·         Trendlines

Financial asset prices usually trend in two ways, up or down. As such, the barriers placed by support and resistance zones are changed periodically. As the market trends up, resistance levels are formed. The price action falls towards the prevailing trendlines. This may occur due to the uncertainty of traders about the future. As such, the price action stagnates and forms a plateau to indicate reduced activity on the sector.

·         Moving averages

Technical indicators are often used to predict the momentum on a trading chart. However, these same indicators could even be used when you want to isolate support and resistance levels and, thereafter determine when to enter and exit a trade.

Moving average is removes the noise from previous price data. Doing this allows a trader to pick out the support and resistance levels. Traders can then anticipate the rise or fall of price with a moving average.

·         Round numbers

Many traders, even across commodity markets, would instead purchase items whose prices are rounded-off numbers. For instance, buying at $100 seems sensible as opposed to $100.o7.

Most newbie traders buy trading items at such numbers. This is because human nature portrays the rounded off price as fairer than one, which includes additional cents’ figures. Moreover, it is quite simple working out rounded off values.

Due to the tendency to trade when prices are rounded off, the market requires several trades to take in the sales. As such, a level of resistance occurs.

Measuring S&R

·         Number of touches

One of the surest ways to determine how significant a price level is by establishing the number of times the price curve bounces off a resistance level. When the price does this repeatedly, traders tend to notice that it doesn’t exceed a certain level either on the tops or bottoms.

·         Previous price action

When the previous price action follows a steep decline, it points to an approaching resistance level. During slow declines, traders do not portray the same level of enthusiasm to trade, and as such, it isn’t accorded the same degree of attention as a dramatic drop would have commanded.

Therefore, S&R zones are highly substantial if the preceding price curve movement follows a steep ascendance or decline.

·         Trading volume

In the trading world, volume is an essential aspect that drives trades forward. To make money, you need volume. Increased volume levels point to increasing interest in an asset as many traders are buying it. The reverse holds as well where little trading occurs as volume drops.

Consequently, as many buyers enter into aa market position, they increase support and resistance at certain price levels. Typically, traders will look for value while trading an asset. When buying, you usually make your purchase when the price is the lowest. In this case, when price action is in decline as it approaches the support zone.

After that, as the price climbs, you get ready to sell when it approaches the resistance level. This position indicates the highest price an asset is likely to attain.

When the volume of trade is significant, it then follows that the S&R zone would also be stable. Because trading tends to experience repeat patterns, traders are inclined to make trades at specific points since the same scenario was witnessed earlier. Additionally, no one would be willing to lose money as an asset and hence the readiness to trade at a known breakeven point.

·         Testing time

S&R zones are usually identifiable on a trading chart. When support and resistance zones often lie along with a specific level over and over, then the likelihood of this trend continuing is pretty significant. Moreover, as these levels hold out for extended periods, then the S&R zones can be counted on in the future.

Many newbies into the world of forex trading are curious as to which timeframe is the best for trading. Most, however, enter into a trade without having a specific exit strategy. Normally, they will hold a position for as long as necessary. While the use of stop-loss and take profit orders helps secure your revenues, having a pre-determined duration within which you can hold complements your trading strategy.

Timeframes are an essential consideration in trading. Because there isn’t a perfect timeframe per se that works across the trading world, traders ought to know the differences between the various options available. This way, they shall be in a better position to go with what works for them as pertains to their trading style, goals and, ultimately, their personality.

At the end of the day, for any meaningful trading to take place, you need to settle on a specific timeframe.

What Is A Timeframe

In its primary sense, a trading timeframe defines your trading style. It is the length of time between your entry and exit into a market. The timescale you settle on decides the amount of time you are going to hold a position on the market.

Usually, timeframes fall into either long-term, medium-term and short-term , timeframes. These two classifications differ according to the trading style employed.

Traders utilizing long-term timeframes generally hold their position much longer than in a short-term scenario. One of the essential factors to consider when it comes to timeframes is therefore your trading strategy as well as the goals you intend to achieve with the venture.

When trading, you don’t necessarily have to stick to one timeframe. You can use a combination of all three successfully. However, before then, you will first need to fully comprehend the significance of employing each of the three timeframes.

Significance Of Timeframes In Forex Trading

Such an impressive scale of liquidity characterizes the FX market as a result of the vigorous trading witnessed by brokers and traders alike. With such remarkable trade volumes witnessed daily on the FX scene, traders can gather valuable information in relatively shorter timeframes.

Additionally, forex markets across the globe follow a 24-hour trading period. Different markets open and close at different times and as such, usually feature varied operating intervals. As a trader, you can switch gears and explore other market conditions as you consider different timeframes across the globe.

The variation that markets display could point out to different characteristics that traders are out to capitalize on. As such, you can go as far as considering varying market conditions across various timeframes.

The key here is variety. If the conditions are unfavorable in your native markets, then switching gears may mark the difference between turning a profit or losing it all.

Matching Timeframes With Your Trading Style

Different traders employ equally diverse trading strategies. As such, the timeframes considered during the activity differ across the board.

Usually, the timeframes traders use to determine how long they hold a trading position vary greatly. Different trading styles necessitate different timeframes. For instance, scalpers consider extremely short timeframes that may last no more than a couple of minutes. This points out to their fast-paced trading approach.

On the other hand, long-term investors would prefer less hurried timeframes and, as such, would hold a trading position for extended periods. These periods may run into days, weeks or months as dictated by the trading strategy.

This section will look at the different timeframes that match the different trading styles in use today.

1.      Day trading

While day trading, operations close at the end of that trading day. This means that traders will rarely hold their trading positions past close of business on that day. It is a short-term trading strategy whereby traders take pre-determined positions as worked out by their trading plan. Once trading closes, a trader also secures his or her returns for the day, regardless of a profit or loss.

The timeframes used during day-trading range from a few minutes to even several hours. This range often depends on the market dynamics as well as the traders’ overall goals. Even so, the timeframe should not exceed the particular day during which trading happens.

Day trading is common since the selected timeframes elapse quickly and traders can monitor their results and evaluate future strategies following the day’s achievements.

Despite its popularity, it is one of the easiest strategies that can yield losses. This is because of the unique nature of day trading that necessitates frequent trading decisions. In trading, your experience is a valuable asset, and more so when faced with multiple choices.

Typically, day traders have to monitor market trends for shifts in price direction constantly. As such, this becomes a constant activity that often wears out traders, especially those who haven’t been in the game for long.

In the beginning, short-term trading may seem like an ideal form of trading. Results come in as soon as you place a trade. So, in theory, you could potentially make a profit every day you trade. However, unlike what is sold in countless blogs online, day trading takes time to master and the learning curve is unforgiving.

If you are considering the shorter timeframes, day trading is popular with, thin again, especially if you haven’t tried out other trading styles.

2.      Swing traders

Traders make extensive use of technical analysis as a means of determining their entry and exit into the market. Long-term trading is characteristic among swing traders and they will often hold a position for a few days and may run for up to a week or more, rarely more than a month.

Swing trading is often considered the ‘sweet spot’ when it comes to trading durations. It is a sort of combination between the highly compressed day trading and the otherwise stretched day trading scenario.

Through swing trading, traders are backed by the advantages of both short-term and long-term trading strategies. And as a bonus, they rarely have to take on the risks the other trading classes put up with, hence its popularity.

While swing trading, you can use both daily charts and hourly ones to determine your trade entry. The daily chart presents the prevailing trend in the commodity or currency you wish to trade. Once you identify the pattern, a much condensed hourly chart can then assist you in determining your entry point into the market.

3.      Trend traders

While trading trends, you must consider a wealth of information and conduct a thorough analysis of the market of interest. This is because positions are held for significant periods and a wrong approach to trading could mean a considerable loss of money.

Because of the length of time trend traders are involved in a trade, it only follows that their timeframes are much more substantial.

Regularly, trend traders seek out long-term trends in the market. To do so, they have to consider price movements for extended durations before investing. To identify a possible pattern, you have to consider weeks, months and even years’ worth of data to pinpoint with certainty how the trend moves.

Even after identifying a potential trend, the time taken for it to mature and yield the desired results is substantial, and trades may often run for months or years on end. Patience is a must-have attribute for trend traders before one can consider liquidating their positions.

4.      Scalpers

These guys are basically day traders but follow extremely short-term timeframes that are dictated by whether the trade in question has returned a profit. Scalpers work fast, and rarely will they hold a position for several hours.

With the speed that scalpers follow in trading, the right market conditions mean that they make decent, if not impressive returns in such a short amount of time as opposed to other long-term traders.

However, the opposite holds when the market moves against them; losses are a constant scenario. As with day trading, you risk a considerable amount of your money scalping due to the high frequency of trading activity involved.

Additionally, extremely short-term timeframes have very little room for error. So unless you eat, drink and live in the trading arena, get into scalping at your own risk.

Trading with multiple timeframes

Once you get the hang of using a single timeframe for trading, you can broaden your trading approach with the use of multiple timelines. It is a surprisingly well-known concept but hardly put to use once traders specialize in different trading approaches like day trading, momentum, trend etc.

Multiple timeframes simply combine different timeframes to compare different trading approaches. You need as much information as you can get your hands on when trading for profit. Multiple timeframes can provide this and go a long way in defining the result of your trades.

Multiple timeframe analysis

An analysis of multiple timeframes considers a currency pair’s performance during different timeframes. You can ponder their profitability in several frequencies to get a good idea of how the currencies perform in each.

While you can study several varying periods, three periods are adequate and will deliver comprehensive details surrounding the currency pair. As mentioned earlier, as you take into account more information, you will be in a better position to predict the outcome of the trade. Considering fewer than three timeframes will result in the loss of essential data that could have been the key to your success. Any more and you run the risk of redundant analysis.

As such, traders ought to reflect on trading with multiple timeframes as a way of ensuring profitable outcomes.

In general, when considering multiple timeframes, you have to follow a four-step course. It mainly involves taking into account the three main timeframes in use and striking a balance among them.

Typically, multiple timeframe analysis requires that you first determine the medium-term duration for a trade. Once this is established, get the short-term timeframe which ought to be a quarter of the medium figure. And finally, the long-term timeframe comes in last. It should be at least four times greater than the intermediate timeframe figure.

Selecting your preferred timeframe classes should also match your trading style. For instance, day traders can go with a 60-minute figure as the median, 15-minute, and 24—minute timeframes then point to short-term and long-term periods respectively.

In the case of long-haul traders, these figures may prove impractical, and you need to adjust your data accordingly.

·         Long-term timeframe

While trading, monitoring the prevailing trend works in your favor. And as such, the long-term timeframe allows you to get a broad picture of how the market is moving.

While you shouldn’t base your trades on such a chart, it is advisable to follow the general trend direction as derived from a long-term timeframe.

Currency markets are affected by fundamental factors in prevailing global markets. Therefore, besides monitoring price action during a long-term timeframe, be keen on the goings-on around the globe. The more time you allow a trend to develop, the higher the likelihood that various factors will have a role in their direction.

·         Medium-term timeframe

As you scale down to a medium timeframe consideration, you are further bringing to the fore smaller moves that form part of the general trend. The medium timeframe strikes a balance between long-term and short-term timeframes and, as such yields valuable information.

The medium-term timeframe is vital as it is gotten from the average time a trader expects to hold a position. Therefore, you must monitor this chart as frequently as possible.

·         Short term timeframe

Shorter timeframes provide a clear picture of the specifics that affect the general trend. By monitoring this period, you will get a sense of minute price activity taking place and pick out entry points into the market.

Like long-term timeframes, fundamental market information is essential owing to the effect on currency markets that fundamentals bear. Observing these minute periods should reveal the impact on the prices following global market reactions. The reaction, unlike trends in a long-term timeframe, is magnified and therefore hard to miss.

On a chart, these moves are pretty sharp and may often follow a repeated trend, hence the term noise. Traders should consider how other timeframes progress while monitoring short-term timeframes.

·         Combine the three

Once you consider all three timeframes, you will ultimately have a bigger picture of the trade you are about to enter and potentially improve your odds of profit investing in the market.

With a combined strategy, you can then check to see if the timeframe analyses of each period are consistent. If conflicting, you are better placed to exercise caution before trading.

On the flip side, however, if everything lines into place and the trend established in the long-term timeframe follows through up to the short-term, then trading such a scenario has good prospects. To be confident in your trade, these three timeframes must be aligned.

When you incorporate multiple timeframes in your strategy, you should be able to identify, with ease, strong entry, and exit levels, especially on the short-term chart. Identifying support and resistance readings is beneficial to traders in that they can avoid weak entry prices, correctly place stop orders and have reasonable targets for their trade moves.

Takeaway

Timeframes are a critical aspect of trading. They provide essential information on how the market behaves and can dictate when to enter or exit a position. As timeframes usually match with a specific trading style, you can use them to identify trends and follow through with a trade.

Multiple timeframe analysis can also provide additional data into price movements and the cause of such activity. Having an exhaustive understanding of the three timeframes goes a long way in increasing the confidence of your trade.