In the first part of this article, I talked about the critical importance of getting the direction of your trade right, by doing a proper top down analysis. If you are not doing a top down analysis, you are making life very difficult on yourself in my opinion.
Here is a statement that I always emphasize to people macd indicator who take a personal coaching session with me: “Always align your trading with the higher time frames!” Whatever time frame you’re trading 5 minute, 15 minute, daily, etc, figure out what’s happening in the bigger picture, and then use the smaller time frames to structure a good, low risk, high reward trade!
So let’s take a look at how we might use this information to find a trade. For instance on December 18th, 2006, the USD/CHF had rallied off of a yearly low and as it came up, you should be asking yourself where it would be logical to expect price to stop going up. Where is there going to be resistance in the big picture?
Well, actually there was a convergence of several different tools on the daily chart that told us that we could expect a top just over 12200. Obviously I can’t go into great detail in this article on all of the different tools. But I want you to realize how powerful it is, and how important it is, just to know that there was a coincidence of no less than 4 independent tools that we like to use. All these tools converging at one price, indicating that we could expect price to stop going up at that point! Folks, that is good stuff to know.
The next step in the analysis is to then examine the lower time frames to see if they are offering any further clues that we might be at a top. In the first part I talked about the power of MACD divergence to price, and how divergence on higher time frames can offer great trading opportunities on the lower time frames. Now, when price had reached the major resistance that we had expected on the daily chart, take a look at what is MACD doing on the hourly chart. Once you see MACD negative divergence on the hourly chart, you are now getting positive confirmation that a top is likely at hand. The next step is to simply go short using whatever entry method you like to use – Fibonacci, Stochastics, trend line breaks etc.