Another active week in the currency markets. I mean broad, predictable vertical price movement. For me, predictable is if I can identify the market structure. If so, I have a fair chance of realising when the form is moving from balanced to trending. No matter how brief or extended. I worked this week rather pleasingly in terms of results with side by side a 5-minute and a 500 tick chart (and a 10-minute VWAP chart for mean reversion guidance).
To the casual observer, they look similar. And that is true. The 5-minute and the 500-tick harmonisation is close but derived from a different source. The 5-minute is, of course, the price movement that occurred during that specific five-minute period. The tick bar, alternatively, represents the net effect of each five hundred bought and sold contracts.
Why did I like this trading combination?
Market conditions always favour a specific set of trading parameters depending on market activity. However, often this is only evident after the fact. Therefore, we go into our work generally with a known system (how we’re going to trade today) and fit it as best we can to the conditions that develop. The market can favour a set of trading parameters for days, weeks and even months. So a regular change in our system is not needed.
I’ve worked a lot with a standard split of charts. Maybe using the 5-minute chart as the principle with the lower timeframe assistance of, say, the 2-minute chart and a higher timeframe—for mean reversion estimation—of the 30-minute or hourly chart—all standard stuff. But as I hinted last week, we can get in a lot of bother with overly interpreting the lower timeframe charts.
I use the mnemonic ASSS before I enter a trade. That stands for: always in, structure, setup and speed. The ‘always in’ is the initial key. It is where I decide which probable direction the market is favouring for the timeframe in question—long or short. You have guessed it, though. The lower timeframe chart can often be at variance with the principle diagram. No problem, we wait until the lower timeframe ‘always in’ direction agrees with the principle timeframe. Easy in theory, not so simple in practice.
Understand that on or about to enter a trade, most (and particularly inexperienced) traders’ IQ drops by about 100 points. Not ideal when we have to manage differing setup suggestions on very fast-moving platforms.
The trading combinations of the 5-minute and 500 tick charts provide correlation in structure and ‘always in’, but one can present us with a setup when the other does not. Two possible bites at the same cherry. Other traders might want to find a different trading tick chart correlation. On a limited test (over several months, creating hundreds of setups), I got three times more entries from the tick chart than the correlated minute chart.