In today forex faq, we have a question from one of our fellow traders asking the below question.
which time frame should we use to determine whether the market is oversold or overbought?
when trading for example, the 15 min time frame and the stochastic indicator is showing oversold whereas the higher time frame stochastic say 4hr is not oversold yet how do we judge the market?
How do we reconcile the difference in the stochastic readings of the lower time frame and the higher ones?
From my opinion, there is no specific time frame that is best to determine overbought or oversold. It really depends on which time frame you are using to find trading opportunity as well as entry.
For example, if you are using the hourly chart to look for trading opportunity. You will only be interested to know whether the price on the hourly chart is showing sign of overbought or oversold. There is no way you can get alignment on all time frames for sign of overbought or oversold.
When you see that that the price reverses on the 15 minutes chart, if you go to the 4 hourly chart, the price is merely doing a retracement. Therefore what you should be concerned with is only the time frame you are using to find trading opportunity.
When we do a top down analysis from the higher time frame to the lower time frame, what we are looking for is just the major support and resistance as well as the overall time frame. We will never look at the MACD indicator, stochastic or any other indicator on the higher time frame.
We only look at the indicators at the time frame that we are using to look for trading opportunity. Therefore I hope that I have answered your question. For those of you with any questions or anything to share with us, do feel free to give us your comments below.
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