How often do you look at the weekly time frame? At least once before every trade or every once in a while?
Most Forex traders I speak with don’t use the weekly time frame nearly as much as they should. This is especially true for the traders who recently made the transition from the lower time frames to the higher time frames.
But even those who have been trading the daily charts for some time forget to check the weekly time frame before putting on a trade. Even I was guilty of this oversight shortly after I began trading on the higher time frames in 2010.
While this may sound like a small oversight, it can mean the difference between a seemingly favorable setup on the daily chart and a disastrous one.
Why Is the Weekly Time Frame So Important?
The weekly time frame is critical for similar reasons that I feel the daily time frame is superior to the lower time frames. But more than that, the weekly chart is important because it contains five days worth of trading. That’s five days worth of liquidity to form a single candle.
While that may sound obvious, it has huge implications.
Have you ever heard of something called “herd mentality”, also referred to as “mob mentality”? To be succinct, these terms describe how people are influenced by their peers to make certain decisions or adopt certain behaviors.
Forex trading is a perfect example of herd mentality. This is especially true for technicians, or chartists as some have come to call it. As technical traders we make decisions based on how the market responds to certain areas of influence called support and resistance levels.
In essence we are watching what “the market” does as a whole and reacting accordingly. Another way of saying it is that we are following the herd. Which is fine as long as you are following the smart money and staying away from the pig pen – we all know what happens to those traders.
Your ability to follow smart money is directly correlated to the odds of becoming a successful Forex trader. You can’t become successful until you develop this ability.
So why then is the weekly time frame so important?
Because it gives you a broader scope of what the smart money is doing. It does this by showing five times more price action than that of the daily time frame.
That’s an invaluable asset to have and one that you should not be ignoring.
Now that you have a good grasp as to why the weekly time frame is so important, let’s take a look at an example of how using it can improve your trading.
Using the Weekly Time Frame to Stay Out of Trouble
A great way to use the weekly time frame is to avoid taking a position that isn’t as favorable as it may first appear on the daily time frame.
The GBPUSD daily chart below shows what would otherwise be a valid bearish pin bar setup at key resistance.
As nice as this setup may look, it doesn’t take long to notice that it didn’t work out. Just three days after forming the pin bar, GBPUSD rocketed higher taking out the tail of the pin bar. From there it was a straight move north to the tune of 400 pips.
So what went wrong? How could you have avoided this loss?
The weekly chart holds the answer. But before we get into the weekly chart, I should point out that the bearish pin bar above occurred on a Friday. While the timing of this pin bar was not an issue as we wouldn’t look to trade it until the following Monday, the price action on the weekly time frame was cause for concern.
Notice in the weekly chart above, the very same week that produced the bearish pin bar also produced a bullish engulfing bar. I don’t know about you, but that isn’t something I want to try and trade against.
By simply checking the weekly time frame before entering the market you could have avoided a loss from what appeared to be a valid pin bar setup on the daily chart.
The example above is just one instance. However, occurrences such as this happen every week, allowing you the opportunity to better position yourself in the market once you begin using the weekly time frame.
Becoming a successful Forex trader is all about putting the clues together in a way that gives you the upper hand. One very big clue can come from the weekly time frame, as you have just witnessed.
If you aren’t currently paying attention to the weekly time frame you aren’t getting a complete picture of what the market is doing. This limited visibility will hinder your ability to properly analyze a trade setup which can put you at an immediate disadvantage.
In order to stack the odds in your favor as a price action trader, you have to use all available resources to your advantage. And the weekly time frame is a huge resource that you need to tap into if you wish to succeed in this business.
Do you currently reference the weekly time frame before putting on a position? If not, do you think you will start having read this lesson?
Leave your comment, question or general feedback below. I look forward to hearing from you.