What is different and what remains the same? This is one of the key questions for traders trading in different time frames or in different markets.
We often hear the argument that a technical tool or pattern works the same way in any market or timeframe, that we can analyze a currency chart the same way we can analyze a stock chart or a commodities chart. The people who invariably make this claim are what I would call casual chartists – people who just look at charts, maybe draw some lines, imagine some Fibonacci levels, and set goals.
Who never makes this claim? People who do actual market analysis, be it through system development or quantum analysis. These people know that there are some subtle but very important differences between asset classes. (I suspect a lot of the casual chartists would discover the same thing if they actually traded, but that’s another topic!)
The like doesn’t mean the same thing
Most of the important differences lie in the balance between medium reversal (the tendency for a market to reverse significant moves) and dynamics (the tendency for one large move to lead to another move in the same direction).
On the daily chart, for simplicity, stocks are more likely to be a return than a big move. Of course, your brain is likely already providing plenty of examples of why this statement is wrong, but you are anchoring yourself in recent events (late July 2020 for posterity). Yes, TSLA went on a gigantic run and didn’t stop. Yes, some stocks were battered by COVID (e.g. HTZ, CCL etc) and have not fallen behind. In fact, we can look back over the past few years and see that some tech stocks seem unstoppable.
This is true, but this is also why perspective is important. By focusing on these recent events, you will bow to a cognitive tendency and make a common mistake. The only way I’ve ever found to contradict this is to look at statistics on a large number of events over a long period of time and that’s where you’ll find that stocks tend to step back more than they extend. (Footnote: Just to cause one more complication, stocks tend to drift upward by about 7% a year on average. This needs to be taken into account in our analysis as well.)
Currencies, on the other hand, don’t mean they’ll return the same way. Here’s why this is important: Most stock traders looking at the chart of EURUSD above may have expected a reversal somewhere around points A or B. However, when we understand that the patterns have different expectations, we know that we are looking at these points for a long time and that there is a higher chance that a currency will slide into a slide along the band trend than a stock.
The devil is in the details
We can In fact, use many of the same tools across all asset classes. For example, I trade pullbacks in stocks and currencies, but I do this in subtly different ways (some of which I may not be fully aware of). One key difference is that you want to “give forex trades a chance” – you can reasonably expect to expand in a way that stocks do not and it is important to avoid the tendency to fade or on a currency chart to resist a momentum move.
This is another example that is not an afterthought. This was perfectly clear as these patterns evolved over the past few weeks, and I shared my thoughts with our MarketLife members in daily analysis. The challenge for forex traders has been patient over the final stages of consolidation but ready to pounce on trade entries when triggered. Come and think about it … that’s the challenge of all trading in all markets, mostly!
What are you doing about it?
When trading two asset classes or time frames, first review your performance in both. When you do well with one, you reduce your risk with the other and focus on where you have a demonstrable advantage – where you’ve proven you can make money.
Then think about where you are having problems. We often blame psychology when methodology is the real problem. For example, if you’ve been day trading successfully and are killed in the daily timeframe, the problem may not be on your head. The problem could be that you are trying to use day trading tools for a period of time when they are of no advantage because of Different time frames act differently!
This may require a complete overhaul of your approach for the new timeframe, or just a slight shift. But you won’t know if you don’t step back, drop the assumption that trading instruments are universal, and do the in-depth work to improve your lead in any market.