I’m trying to use overbought indicators to gauge my entry points but the price might be overbought on the daily but oversold on the 4 hourly, then it might be overbought on the hourly but oversold on the 15 minute etc.
Basically at any given point in time the price is ALWAYS both oversold and overbought depending on which time frame you’re looking at. So how do I determine which one is correct? I go long on the hourly because the hourly is oversold but the price drops even more because on the daily it’s overbought…
Or I’ll go short on the hourly because the hourly is overbought but on the 15 minute it’s oversold so the price rallies. It’s like I can’t seem to win… No matter which option I pick the price always goes the other way.
Hi, to build a strategy you must “assume” that certain settings may work, then you create a back test and check how the strategy works. You can’t take all possible factors into account because this is not possible. Regards Greg
Stop looking at multiple time-frames that are irrelevant to your strategy. Pick your strategy according to what you are best at, and then just use its key time-frame plus one that is longer as a filter.
So if you have a strategy that works pretty well on a day-trade based on 1-hour bars, do not look at anything shorter, but do take account of any strong trends, support or resistance derived from the daily chart.
But I get conflicting feelings then because it may very well be oversold on the hourly but on the daily it’s overbought. I don’t think I’ve ever seen a pair which has been overbought or oversold on the weekly, daily, 4 hour and the hourly all at the same time.
There’s always 1 time frame which will disagree with the rest. So if I’m trading the hourly and it’s oversold but the 4 hour and daily is overbought, which one do I trust? Which one has more weight in being correct?
I’ll give you a live example right now.
GBP/USD, Daily is approaching oversold, 4 hour is oversold, hourly is oversold, 15 minute is oversold. This sounds like a buy opportunity right? Wrong! Because the daily is not oversold yet so it can still go much lower?
But then if we go to the weekly time frame, it’s only just coming out of being overbought so from a weekly point of view, this downwards move might only just be getting started…
Back-testing and experience will tell you which combination statistically works best. I suggest fixing one time-frame for trade set-ups, entry and exit price levels, and then a longer time-frame for filtering trade ideas. Keep the key time-frame fixed but vary the filter time-frame and log the results. Make sure you keep sight of stop-loss and take profit rules as you vary the filter time-frame.
Right ok. So as an example the EUR/GBP 4 hourly right now is absolutely screaming overbought. So I drop down to the hourly and that’s also overbought. I drop down to the 15 minute and it too is also overbought! Awesome.
But then I go to the daily and it’s oversold
So which one do I believe, the daily, or the smaller time frames?
Still getting it all wrong…
Assuming I want to trade EURGBP, then assume I love using only H4 to detect Oversold or overbought level. I go to my H4 right now and it is signalling over bought. It means I will be looking for only sell signal in the lower time frame say 30minutes. I move to my 30M charts and watch for a sell signal usually doing this through candlestick behaviour. Note that I don’t check if 30M chart is over bought or over sold. I just hunt for only sell signal using candlestick behaviour.
Again assuming I love to use only D1 chart to detect Oversold or over bought level. It means I only check if it is over sold or over bought in the D1 chart then I moved to the lower TF say H1 and look to buy only if it signal Over sold in the D1 chart. I don’t waste my time checking oversold or Over bought in that H1, I just look out for candlestick that signal me to buy only.
EURGBP has passed the oversold level a little bit in the D1 chart. If a trader bought when its over sold level were still fresh and low using H1 as his trigger chart (buy price action lookout), he would have made some pips. So do your work by backtesting. It sounds like a profitable setup
So my EUR/GBP short just got stopped out. Even though the H4, H1 and 15M were all screaming overbought, the daily was screaming oversold. So the daily is the one that really matters it seems.
Another way to look at this - a certain type of entry opportunity occurs on a time-frame and statistically such signals have a validity of about 20 bars. If that time-frame is H4, what’s H1 or 15M got to do with it?
Making sure the higher time-frame filter is in alignment might raise the probability from moderate to high but it does not guarantee anything. You might ignore it, you might use a tighter SL, you might use a smaller position, you might use a tighter TP, you might use a less ambitious r:r. Nothing is ruled out, nothing is ruled in.
We use the H4 to see the future and the future says it is over bought. We should then look out to sell in the present (30M) because in the future there would be potential sell . If you wait to sell the 4H, the candlestick in the 30M would have go down several times up to 8 sell candlestick but in the 4H it would just be 1 sell candlestick.
If you saw a pair was overbought on the 4H but oversold on the 1H and 30M would you still sell?
This is the dilemma my friend. One time frame is telling me to sell, the other is telling me to buy. I really don’t know how to explain it any simpler.
