This week’s question comes from Thambirajah, who asks:
When there are conflicting trends as you mentioned in the last Q&A post – such as the daily time frame in an uptrend and weekly or monthly in a downtrend – how do you determine which one to follow?
The answer to this question will vary depending on who you ask.
It varies because it depends on your individual style of trading. Everything from the time frame you utilize to your particular outlook for a given currency pair.
For purposes of this lesson, we’re going to focus on something called a time horizon. And while a time horizon in the financial markets usually applies to equity investments, it’s just as applicable to trading Forex.
Note that a time horizon can also be called a holding period. The meaning of the two terms is virtually identical.
What is a Time Horizon?
In the financial world, the term time horizon describes the length of time an asset is held. It’s the period between the initial entry or acquisition and liquidation.
As mentioned above, the term usually refers to the holding period of investments rather than short-term trades.
But for the Forex trader, defining how long you intend to hold positions is just as important as it is for the long-term investor.
After all, it’s part of your identity as a player in the Forex market.
How Should You Determine Your Time Horizon?
For me, a typical holding period is anywhere from a couple of days to four weeks. While I have had a few trades last more than a month, it certainly isn’t the norm.
This is my time horizon because I mostly trade the 4-hour and daily charts. I do take the occasional 1-hour setup, but 90% of what I do takes place on the 4-hour and daily time frames.
You can probably see by now why I said your time horizon depends on the time frame you utilize.
On the other hand, if you trade the 30-minute charts, odds are you won’t be holding a position for four weeks. Instead, your average holding period might range from a couple of hours to a few days.
Let’s apply this line of thinking to the various trends that exist in the financial markets.
Long-Term, Intermediate and Short-Term Trends
In the equity markets, these are referred to as secular, primary and secondary trends. These terms are interchangeable with long-term, intermediate and short-term trends.
Let’s define each one.
- A long-term (secular) trend is one that lasts for 5 years or longer
- An intermediate (primary) trend is one that lasts for 1 year or longer
- A short-term (secondary) trend is one that lasts for a few weeks to a few months
Now, these various trends can sometimes be the same. If the long-term trend is down, the intermediate and short-term trends can also be down.
However, where traders tend to get tripped up is when there are conflicting signals. For instance, the long-term and intermediate trends are down, but the short-term trend is up.
So what do you do?
It all goes back to the time frame you utilize and your time horizon for a trade. If I’m faced with a situation where only the short-term trend is up, then I’m only interested in selling opportunities.
Remember that my time horizon ranges from a couple of days to four weeks, and sometimes longer. As such, I’m more interested in the larger swings in the market that compliment the intermediate and long-term trends.
Now, if you’re trading the 30-minute chart and that short-term bull trend lasts for a few weeks or months, there are probably several opportunities that you’ll want to take advantage of along the way.
It’s all about finding the right amount of momentum to compliment your style.
Let’s take a look at an example on the EURUSD. First up is the daily chart showing an intermediate downtrend.
This type of trend fits my style of trading and time horizon. As such, I’m only interested in selling opportunities. Anything else is against the trend according to my style of trading.
Now, here’s how the 30-minute chart has looked for several weeks.
If your trading style calls for short-term trades that last a few hours or maybe a day or two, you could technically look for buying opportunities within this short-term uptrend.
At the end of the day, it comes down to the way you trade. The time frame(s) you use and how long you intend to hold a position will dictate which trend(s) you pursue.
With that said, my experience has taught me that the best trades tend to materialize when all three trends align. It’s during these times that you can take full advantage of the momentum and allow your winners to run.
There are three types of trends. They are, long-term (5 years or longer), intermediate (1 year or longer) and short-term (a few weeks to a few months).
The trend you choose to trade depends on your trading style and time horizon. And the time frame you utilize will usually dictate how long you hold a position.
Finding your identity is a crucial step to becoming a successful Forex trader. Like anything in life, the only way to find what suits you is to study, practice and persevere.
Your Turn: Ask Justin Anything
I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.
To do that, I need your help.
Here’s what you can do to get involved and have your question answered in next week’s post:
- Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
- Help me answer questions. If I missed something or if you have something to add, don’t hesitate to leave a comment below.