Do you focus on price movement and support and resistance levels without taking into account the factor of time?
The chart, however, offers two dimensions: price and time. While price is plotted on the vertical line, time is plotted on the horizontal line.
In a high leveraged market as the Forex market, entering a trade setup at the right price is really just half the story.
Without proper timing, your well intended analysis and great trade setup could leave you penny less. Entering a trade at the right time is equally important.
This article will explain why time factor is essential for understanding price charts and the Forex market.
Impulsive price action is characterized by three aspects:
But impulsive price action is also determined by a time element.
An immediate HH or LL confirms the momentum but what happens if one candle fails to confirm a HH or LL?
What happens if 2 to 6 candles fail?
After 6 candles fail to break a high or low, momentum considered to be finished.
In most cases if 2 to 6 candles fail to break for a higher high or a lower low, then indicates:
As the above image shows, price action usually makes a smaller retracement before continuing with the trend.
However, if more than 6 candles fail to break for a higher high or lower low, then this could indicate that momentum is fading and that a larger retracement has a higher chance of starting.
If 5 to 6 candles fail to break, then the current impulsive price swing is most likely finished and a corrective price swing is probably starting.
Time patterns help traders with two critical aspects:
As you can see, not only candlesticks provide key information about the impulse, but time patterns too. Via time patterns we are able to estimate the end of an impulsive price swing, which is very useful information because it allows traders to:
Once again, the time pattern gives us useful information about when the impulse is expected to be running out of steam.
The end of an impulsive price swing does not necessarily mean that the trend is finished. Price could simply make a correction, like a pullback or retracement within that trend, and then show a trend continuation.
The end of the impulsive price action does signal indecision and increases the chance of sideways or reversal price movement.
It means that one side (bulls or bears) had control but lost it and it remains a question mark whether they will regain it.
Impulse and correction are a critical part of wave and Fibonacci patterns, which is explained in our special Elliott Wave Patterns & Fibonacci Relationships Core Reference Guide.
You might be wondering, why do we use 5 to 6 candles?
At first I only used the 5 candles as the rule but from experience I noticed that the 6th candle provides a decent breakout too in certain situations. The number 5 is based on the Fibonacci sequence and fits within the 7 day rule used in weather forecasting. Both the numbers 5 and 6 work well and I use the following rule to decide whether to use a 5 or 6 candle count:
The 6th candle is usually the one that needs to break the high or low to confirm that the impulsive price swing is still active. I would only make an exception to this rule if the 6th candle has a very strong (large) candle that is in the same direction as the current impulse and price is close to breaking the high or low as well.
The correction patterns also tend to align themselves with time patterns. From our experience, we tend to see price continue successfully if price breaks the correction on candle number 13 or higher. The most false breakouts, also called fake-outs, occur between candle number 5-6 and 13.
Another key factor is to keep an eye on the type of price action is visible between candle number 5-6 and 13:
Any breakout that occurs between candle 13 and 34 is often sturdy and trustworthy. Of course, this is just a rule of thumb and exceptions are always available.
Breakouts that occur between candle number 34 and 55 are question marks and depend from case to case. Breakouts that occur above candle number 55 tend to be weaker, because in this scenario, the price is already building a larger correction on a higher time frame. Traders could think about monitoring one time frame higher after candle number 34 and especially after candle number 55.
Here is a 1 hour chart where price breaks on candle number 49. Price makes a false break and first retraces before moving up higher. Rather than trading a breakout on the same time frame, we prefer to zoom out and monitor the breakout or reversal on the higher time frame.
The higher time frame (see image below of 4H chart) does neatly capture the right breakout moment.
If 5-6 candles fail to break on the higher time frame, then the same situation could occur where a larger correction or reversal could take place but now on one time frame higher.
For more information, free analysis, webinars, videos, tools, systems, and methods for trading stocks, cryptos, Forex and options, please check out my website www.EliteCurrenSea.com.
Wish you good trading,