NOVICE TRADER
Hours And Days
The FX Daily Conundrum
by Kristian Kerr
In a 24-hour market, what is the best time frame to use when looking
at charts?
The rising popularity of foreign exchange
trading over the past few years has been impressive. Equity traders fed
up with trying to eke out profits in the brutal bear market environment
have flocked to the fast-paced spot currency markets in record volumes.
This rise in forex's popularity can mostly be attributed to the clear advantages
that currency trading has over other markets. Unlike trading equities,
foreign exchange offers traders true 24-hour trading, excellent liquidity
(over $1.5 trillion a day), and great leverage (up to 200 to 1).
Another big factor behind the increase in retail spot exchange volume
has been technically driven equity traders who are switching to currencies.
The technical nature of this market makes it much easier for equity traders
to switch to foreign exchange (also referred to as forex or FX) than to
other markets, although forex does have its own nuances that must be understood.
The biggest issue for most technical traders making the switch is the daily
chart. Due to the structure and nature of the currency market, the daily
is not as effective and useful in FX as it is in equity trading.
24-HOUR TRADING
The nonstop, round-the-clock nature of trading in the foreign currency
market is definitely one of its most enticing features, but 24-hour trading
brings its own set of issues. One of the most important is the validity
of the daily chart. Short-term equity traders rely heavily on the daily
chart to determine proper entry and exit points. After switching to forex,
many traders like to use the same techniques that they used to trade equities
and, for the most part, technical equity trading methods can be successfully
adapted to trade FX. However, traders often run into problems when they
try to use techniques based on daily chart patterns.
Figure 1: Daily chart of EUR/USD -- same time span. The
two charts are similar, but they differ enough to wreak havoc on the signals
of a pattern-based trader. The chart on the bottom shows a clear hammer
off a key support level, while the same candle on the top chart is not
nearly as significant. On many bars, the highs and lows (popular entry
points for swing traders) are different.
...Continued in the August 2003 issue of Technical Analysis of
STOCKS & COMMODITIES
Excerpted from an article originally published in the August 2003
issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 2003, Technical Analysis, Inc.
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