The bluepowder approach to trading forex
a very brief introduction
Here we provide a very high level overview of our methodology in trading the foreign exchange market. Whist there are many facets to this we will focus here on the primary technical analysis aspect only. Here I am assuming some understanding of standard terminology, but please contact me if you would like clarification of anything.
Multiple Time Frames
The first time I saw the Mandelbrot Set was on a TV program in the early 90s about Chaos theory. Being a bit of a Maths nerd and a hopeless romantic, I naturally found the idea of The Butterfly Effect absolutely captivating - the sensitive dependence on initial conditions in which a small change in one state of a nonlinear (Chaotic) system can result in large differences in a later state. The term, coined by Edward Lorenz, is derived from the metaphorical example of the details of a tornado (the exact time of formation, the exact path taken) being influenced or even caused, by minor disturbances such as the flapping of the wings of a distant butterfly, several weeks earlier. Lorenz discovered the effect when he observed that runs of his computer weather model with initial condition data that was rounded in an assumed, inconsequential way would not reproduce the results of runs with the un-rounded initial condition data. In other words, a very small change in initial conditions had created a significantly different outcome. The metaphorical and actual, similarities between fractal geometry (and chaos theory in general) and the nature of price charts and trading per se are stunning IMHO hence: my excuse for the Mandlebrot Set here.
So, apart from it being a rather beautiful mathematical object it turns out to be a rather nice metaphor. Price charts are fractal in nature. If you take a weekly and a 5 minute price chart of EURGBP for example, you will see that they have the same fractal geometric characteristics. You would not be able to tell which was which unless they were labelled. The thing to understand is that all the tiny directional changes, up and down, on the shorter time frames (e.g 5 minute charts) when added together result in the overall direction of the market. We believe applying this understanding gives us part of our "edge" and differentiates us from those who visit casinos.
Here are 3 snapshots of the EURGBP currency pair taken at the same time. From left to right they are; weekly, daily and 15 minute price charts of the Euro in terms of Pounds Sterling (aka EURGBP). Each candle on these charts represent the range of exchange rates being traded between Euros and Pounds every; week, day and 15 minutes - respectively. Like the coastline of a country they are each similarly "fractal" in nature but - and this is the important bit, they each tell a radically different story. This is the key to many aspects of our trading methodology and it governs entries and exits (stop loss and targets) which are fundamentally a function of how long you are prepared to be in a trade and how much money you are prepared to risk. For example, the weekly chart (left) indicates strong upward momentum with a strong resistance above. You could decide to take a long position from this chart but because we are looking at a higher time frame your stop loss would need to be set quite a distance away in terms of pips, typically meaning you'll need to risk more money. Looking at the 15 minute chart (right) however, we might see this as a shorter term selling (shorting) opportunity - for a smaller number of pips perhaps and a smaller stop loss. In our case we tend to take the daily chart (middle) as our governing rule and "fine tune" entries using the 15 minute chart. There is a lot more to it than what I have described here, e.g position sizing/risk management, support and resistance and of course the secret source "experience" but this should provide some basic starting ideas of how Multiple Time Frames are important (to us anyway). For further insight please feel free to contact us via the contact page.