Understanding Timeframes When We Trade

BarroMetrics Views: Understanding Timeframes When We Trade

Last Friday,  September 18,  Scott Morrison (Managing Director, Tech Wizard) and I appeared on Trading Matters with CNBC’s Oriel Morrison.  Oriel has always brought out the best of  me: she has an easy going manner to which I respond; moreover, she is always well prepared.

But for me, Friday’s show was something special. At the end of it, all of us were amazed that the 30 minutes had flown by so quickly. You could say that we were all caught up in the flow of the moment.

As may be expected, Scott and I had our points of disagreement.

One area was whether “the AUDUSD would get to .8800 without correcting”.

As I was commenting on the question, I realized that our apparent disagreement lay with the fact we were probably talking about different timeframes. Scott took the view that the AUDUSD would correct before reaching 0.8800 whereas I took the contrary position. Scott expected a correction to .8500 before we’d see .8800. On Thursday, Sept 17, the high had been .8775 with .8509 being the low of Wednesday. (Figure 1).

The correction to .8500 was, in my language, a 2-day swing correction.

But as an 18-day trader, I usually look for corrections in the 18-day and occasionally in the 5-day swing. Yesterday, the market corrected to .8589 (Figure 2). So if the AUDUSD now moves to 0.8800, can we say that it corrected? Scott may well say ‘yes’ given that we did have a 2-day swing down; whereas I’d say no – we didn’t even half a 5-day correction.

This difference is not a mere academic exercise for our trading.

We need to identify the timefame we are trading. In this way we can avoid the dangers of hindsight bias. For example, if I say, the 13-week is overbought, I expect to see a 13-week correction; and in turn this means that the 18-day swing probably will change its trend. This allows me to assess statistically a time and price window for the correction – using 13-week corrective stats and 18-d impulsive stats as well as Fibo targets.

2009-09-22-blog-18d-adus-_1.jpg

FIGURE 1 AUDUSD

2009-09-22-blog-18d-adus-_2.jpg

FIGURE  2 AUDUSD

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