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Selecting Your FOREX Trading Window Frames
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Technical analysis is a picture or a window that reflects the attitudes of market participants as shown in the price behavior of a market. It helps us determine support and resistance points. Traditional charting shows us where prices have been (lagging indicators). Certain technical tools give us clues based on past tendencies of the direction in which prices could go (leading indicators).

As we have learned so far, the purpose for using technical analysis is to uncover and forecast market moves. Traders rely on technical analysis to give indications on the trend, support and resistance, trend reversal signals, potential price moves and objectives, and the distance the markets can move based on “measuring” techniques. But what do we do to pull the trig ger to enter a position, and what can we do as traders to put the odds in our favor? For answers, we need to delve into one of the oldest and certainly the most subjective techniques in technical analysis—multiple time frame analysis. Longer-term time frames do influence the shorter-term time frames. But which time frame triggers action first? How do we determine which is the dominant time frame to follow, and what is the shortest time frame a trader should choose against a longer-term trend? More on this sub ject lies in how to choose the appropriate number of time frames. To find out where our window of opportunity lies, we need to ask ourselves:

• Which time frame do you use to trigger a trade?

• Which time frame do you use to set your stops?

• Which time period do you use to establish your profit objective?

TREAT TRADING AS A BUSINESS

Understanding what your objectives are by first having an understanding of what type of trader you are is critical to achieving success. Are you entering a trade as a scalp, a day trade, or a swing trade; or will you look to expand the trading opportunity as a position trade to ride a long-term trend? Another reason that I shared with you in Chapter 1 on the various forex investment vehicles besides the spot forex markets (such as the ex change traded funds (ETFs) and the futures and options markets) is so that you can decide which investment vehicle you may want to use to capture a profit within your risk-to-reward parameters and in the time frame you expect the market might take to reach those objectives based on decisions regarding what your objectives and your expectations out of the trade are or what the time horizon for the market might need to reach those price objectives. Then you will be able to determine which time frame to follow, and then you can monitor the shorter-term time frame as well. You may think of yourself as just a day trader; or maybe you are a long-term trend follower. Eventually you will encounter market phases that may dictate that you diversify your trading tactics. In periods or con solidation phases, as a longer-term trader, you may need to use short-term day-trading tactics to cover your operational business expenses. This is a great time to bring this to your attention because if you are reading this book to expand your knowledge to learn how to trade or if you are cur rently trading for a living, remember that this is a business. You need to treat it like a business. Therefore, some considerations need to be made, such as forming a corporation in order to deduct expenses such as your computer equipment, your quote feed, your DSL line, travel to various in vestment conferences, and continuing education seminars. You should seek advice from a tax specialist so that you can take advantage of all reg ular and necessary expenses as business deductions. This can help you save thousands of dollars each year. What matters most to every trader and investor is creating a positive cash flow. After all, it would be horrible to finally start learning to make money consistently in the market and find out that you cannot take any expense deductions that could literally save you thousands of dollars each year.

As a forex trader, let's see what your total expenses could be: Suppose your quote feed is $200 per month and your DSL is $50 per month. Renting a small one-room office could run $500 to $700 per month. Then there are equipment expenses, such as your desktop computers, a laptop for travel, monitors and printers and ink cartridges and general office supplies to purchase and upgrade from time to time, say $2,000. Attending an investment conference could mean $700 roundtrip airfare, plus $250 per night for hotel and meals. If you have business entertaining expenses and went to at least two conferences per year, you could be talking as little as $5,000 to as much as $25,000 in actual business expenses that can be deducted if you are running trading as a business.

If you are a first-time smaller investor and decide that trading for a liv ing is something you have the financial resources, time, and emotional makeup to trade full time, what business plan do you have in place to pro tect the money you make in the market? Where will you put your profits as a short-term trader? As a longer-term trader, what will you do when market conditions change according to your system or methods? Not only do you need to cover your cost-of-living expenses, mortgage payments, or, for some, dockage fees for the yacht, but you need to cover the business ex penses. The forex market offers an individual a bare-bones means to par ticipate in the markets on a pay-as-you-go method because there are no commissions. Forex dealers do provide, as we covered, free charts, quotes, and news. There are, however, the considerations to cover the bid and the ask spread each time you trade. So if you are a day trader, consider that if you trade a minimum of twice a day at 3 PIPs (percentage in points) per transaction as your cost to enter a $100,000 contract value position, then if you trade 10 lots each trade, that amount would equate to $600 per day. At an average of 200 trading days per year (minus personal days, holidays, and vacation time away from the markets), you need to cover over $120,000 a year, not including covering the losses on bad trades. My point is that trad ing is not free. Therefore, it is important—more like critical—that you ex plore all your options and trading opportunities. Now with that said, let's see how to use various time frames in your analysis.

The first step is to identify the type of trade into which we will enter. Is it a day trade, is it a swing trade (which lasts two to five days), or is it a long-term position trade? Once we acknowledge what our objective is and what our goals are, then we can narrow our expectations. Let's assume I am a day trader. I will generally be able to identify what the average range for a day is and expect that if I miss 20 percent of the bottom and 20 per cent of the top, then I can expect to capture 60 percent of the average daily range. My expectations are now for X amount of a given range. Now how do I start? First, I need to structure my computer and charts to a format that is conducive to day trading. As we went over in the previous chapter, using a system that earmaked 40 PIPs profit on a day trade system, some FX prop traders even set their goals on less that that, for instance, 30 PIPs, or within a specific time period, such as eight or six bars from entry. You need to determine whether you are day trading in order to use these parameters.

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