The Best Time Frame to Trade Forex - An Experiment Trading In The Direction Of The Previous Candle
An observation on the importance of suitable trading time frame,
If the last candle/bar moved up, what are the chances that the next one will move in the same direction? The answer, as is often the case in Forex trading, is that it depends on the direction and strength of the larger underlining market trend and, more importantly, the time frame that we are talking about. With hourly, 4 hourly or even daily candlesticks there is almost certainly no tradable edge to be gained from simply betting on the next candle moving in same direction as the previous one, but what about with larger time frames such as weekly and monthly candles/bars?
On the EURUSD currency pair at least, betting on the next candle moving in the same direction as the previous one, does seem to provide a tradable edge; at least it does on monthly candles/bars. The effectiveness of this strategy on monthly bars or candles indicates the importance of trading with a suitable time frame more than anything else, and the non-random nature of markets on large time frames – the shorter the time frame the more randomness one will observe. Here are the results of this strategy on the EURUSD –
The method tested in this short article is not meant to be a trading system, nor would I recommend trading it. Many improvements such as stop losses and measuring and trading in the direction of the long-term trend would have to be added before this method would approach anything close to mechanical trading system. It's also unlikely that other currency pairs would produce results as good as the EURUSD currency pair as this method derives it's edge from the long term trend and the EURUSD tends to trend very well, especially over the long term. But the results of this short article do highlight the benefits of trading with a long time frame. If this method were tested on, say, hourly candles, then almost no edge would exist. On weekly candles a small edge can be measured. On monthly candles the edge is pretty significant (but could certainly be improved upon).
