How can technical analysis work on a weekly (or longer) timeframe?

Hello all

Wanted to throw this question out there even though I know the answer may just be “It just does”, but:
How can technical analysis work on longer timeframes?

You’re told time and again not to trade just before news, preferably not as it occurs, and while the results are being mulled over - stay out unless you know the fundamentals. There may not be an unemployment figure or rates change coming out every day, but pretty much every day there is something in the news (from Greece, US, China, UK…) that will affect one or more of the currency pairs on a fundamental level.

Now I’m not particularly strong on fundamentals - I can’t even quite figure out if an announcement of QE3 by the Fed (should it come) would be bullish or bearish on cable, all else being equal. I would rather stick to technical analysis, but how can I know I’m going the right way with all this ‘real-world’ news interfering with my charts?

When trading on a longer timeframe, one will generally be using a wider Stop loss, counterbalanced by a more ambitious target. Major news announcements/stories often don’t change the overall trend direction, they just cause some short-term volatility, even a minor reversal, but this often corrects back in line with the overall, pre-news sentiment after a while. So with an intraday trade with a sub-100 pip Stop loss (for sake of argument!) this bounce can be enough to ruin the trade (it might hit the Stop, or delay the trade so much that it might run overnight, contrary to the strategy being used, or clutter your platform thus stopping other trades being taken, whatever), whereas with a longer-term trade, this volatility is to be expected and is generally simply absorbed within the natural Price movement expected within the trade.

Two examples of this - look at the charts for several Pairs, particularly Yen pairs, around the time of the mid-March earthquake: while this caused a large spike, the overall pattern of the pair is not that affected, in many cases. Take CHF/JPY as a good example of this, a Pair that often trends nicely. On the Daily chart, there is a sustained uptrend throughout that period. There is a major drop then rise on 16th/17th March, but two key points: 1) the drop fails to take out the Low of 09/02 (Feb for US readers!) (so would not hit sensibly-placed Stops) and 2) following the Spike, Price makes a higher high and the previous uptrend resumes. A well-planned, long-term trade on this pair would have survived this volatility, with the overall reason for being in the trade unaffected, while an intraday trade placed on the five minute, or the Hourly, or whatever, would most likely have been stopped out.

A second example is NFP, first Friday of every month (obviously!). Look at these on the five minute chart and there is often a very overextended bar (or cluster of bars), but quite often, once this has settled down, the previous overall move resumes. So again, an intraday trade would be likely to have been stopped out, while a longer-term trade has a higher chance of surviving.

Obviously there are exceptions to these examples, there have to be, as in trading nothing works every time (otherwise we would all be rich!), but this is a probability game at the end of the day, and the probability on this subject, in my opinion, is that placing an intraday trade immediately ahead of a major news event is overly-risky, whereas managing a longer-term trade through a number of events over time can work very well.

ST

If you take a look at a monthly chart the same candles, OHLC or
line chart will be similar to a 1M, 5M, 15M etc. In fact if the dates
& prices are removed from the X & Y axes, then it would be
difficult to determine which chart is which.

The difference being the length of time & pip spread on the monthly
chart. On the 1M, one hour’s data, 30 to 40 pips, on the monthly 5 years,
4000 pips.

But the same basic principles apply, just over a longer time frame.

Cheers for the replies, Simon and Daydreamer.

Taking into account the wider stops/more ambitious targets is a very valid point, and admittedly, I hadn’t considered that. And that’s also what Daydreamer was alluding to, saying that the 40 pips turns to 4000.

I know the principles still apply, I suppose what worries me is not quite understanding when a major trend reversal will happen and when a news item just causes a ‘blimp’ or a mere correction. I like to be going with the trend (in general), and when something in the news comes up that causes a reversal I feel like I have to wait a long time before entering again because I’m not sure if this is the piece of news that will changes things for the next few months.

I suppose I either need a leap of faith or more experience. My guess - both… Good job it’s all on a demo account for now :slight_smile:

Thanks for the responses, guys.

TA works on higher timeframes for the exact same reason it works on the lower timeframes. It just does [I]not[/I]

Now I’m not particularly strong on fundamentals - I can’t even quite figure out if an announcement of QE3 by the Fed (should it come) would be bullish or bearish on cable, all else being equal. I would rather stick to technical analysis, but how can I know I’m going the right way with all this ‘real-world’ news interfering with my charts?

Which economies are doing well? Which ones are crappy?
[B]Long [/B]strong vs weak. [B]Short [/B]weak vs. strong. That way when your technical analysis fails you will have the more reliable fundamentals on your side.

Edit; surf in here.
Fundamental-ville: Learn & Discuss the Fundamentals of Forex Trading
Great fundy analysis in there.