In this digital age we are bombarded with information. Advertising and marketing messages via radio, television, news, online; it’s everywhere! Messages about buying this is good or eating that is bad, or doing this is the only way to parent a child yada yada. Whether we know it or not, we have naturally developed a way to filter out this constant information overload to ensure we remain sane – or some semblance of sane.
In trading, there are so many technical indicators and analysis techniques available that traders would be highly advised to develop a filter here too. Knowing what trade signals to act on and which to ignore is lesson number 1 for every new trader. So what signs do we need to act on and which to ignore?
By way of an example, let’s consider the Sliver 1-hour chart below. Yesterday it was exhibiting a good up trend, stair stepping it’s way higher. Was it a good idea to act on this signal and buy silver? Let’s analyse this trend further…
On the 2-hour chart below, it looks even better! Notice how cleanly price is bouncing higher off the upending moving averages (which are text book for a good uptrend according to our trading philosophy). Now, what’s your decision – to buy or not to buy? Let’s look further…
The 4-hour chart is also in agreement, with price stepping higher with the moving averages climbing higher Righto, that’s three timeframes that are in agreement, time to buy. But wait, there is a crucial bit of information that we are missing. Before reading further, consider this question – what sign are we ignoring?
The daily timeframe! This is the daddy of all timeframes. As such it really should be our number one port of call for any analysis. We see below that there currently isn’t a trend in place. The moving averages are all over the place, while price seems to be heading for a potential retest of the upper range.
Hang on, but all the lower timeframes are trending beautifully? Surely, we can ignore this lack of trend on one timeframe? After all its just one small factor, right?
Now let’s skip lightly forward 24-hours and see what Silver has done. Remember that traders don’t have the benefit of capitalising on hindsight. Silver has failed to push higher and has reversed through the rising moving averages. Could we have anticipated this yesterday? Certainly not. But, trading against the daily trend, or rather in the absence of support from the daily trend can often lead to a failed trade.
So if you have begun filtering out the messages that the daily timeframe sends, then it might be a good time to consider making some adjustments as ignoring the signs from this stalwart timeframe should be done out your peril!