August 12th 2021 Education

Using Signal and Timing Charts in Forex Trading

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The majority of successful FX traders have some sort of bias long-term trends. Long-term trends usually develop gradually over a long period of time and do not change direction unless faced with a large surge of momentum. To be a successful FX trader, you have to be aware of levels of support and resistance across multiple timeframes as well as the direction of the trend.

This is why it's very important to concentrate on multiple timeframes on your charts to get the information. Particularly there are three types of charts that you need to include in your technical analysis, two of which are Signal charts and Timing charts.

What is a Signal Chart and How is it Applied To FX Trading?

With a signal chart, you get the trading signals which point you towards the direction of buying and selling opportunities, based on what methodology you use. For example, use the signal chart when you use the commodity channel index to identify trading signals. The indicator should not be used on both the trend and timing charts.

By combining a signal chart with a trend chart, you can identify potentially profitable trade signals accurately. For instance, you should be on the lookout for buy signals on your signal chart if your trend chart shows a particular currency pair in an uptrend. Similarly, you should look for sell signals on your signal chart if the currency pair is in a downtrend. Thus, the best way for you to profit from a longer-term downtrend is by selling the currency pair.

Trend charts allow you to ignore the signal chart’s less profitable trading signals. These trading signals will most likely be unsuccessful because they go against the longer-term trend. However, simply using signal charts won't help as you need to determine your entry and exit points by looking at the timing chart as well.

What Is A Timing Chart And How Is It Applied To FX Trading?

As the name suggests, the timing chart helps traders with timing their trades, more specifically, entry and exiting. In FX trading, every pip counts. This is why you must identify your entry and exit points accurately to make the most profit off trades. Some of the common signal chart timeframes are listed below. Use these to figure out the appropriate timeframe for your timing chart.

  • The 1-week timing chart is the 1-month signal chart
  • The 1-day timing chart is the 1- week signal chart
  • The 1-hour timing chart is the 1-day signal chart

How To Use Timing Charts?

When using timing charts you can follow one of the two following methods:

  • Identifying Trends, Support And Resistance Levels

To identify trends, support and resistance levels, you need to make the following observations. If there’s a buy signal on your signal chart, the currency pair must be in an uptrend on the timing chart. The price of the currency pair should also be closer to support than resistance. This is an indication that the currency pair has room to move higher before approaching resistance. If it breaks through resistance, it will undoubtedly move higher.

  • Using Technical Indicators

You may use technical indicators such as the commodity channel index to generate buy and sell signals on your signal chart. Use the same indicator to identify entry and exit points on your timing chart. For instance, when applying the commodity channel index on your signal chart to get a buy signal, use the indicator on your timing chart and make sure it gives you a buy signal as well. In case the indicator is not producing a buy signal on the timing chart, wait for the signal before entering a trade.

Example Of A High Probability Trade Setup

Let’s say that we are using a multiple time-frame trading approach on EUR/USD, where the 1-hour chart is the timing chart, the daily chart is the signal chart and the weekly chart is the trend chart.

  • The weekly chart reveals that the EUR/USD pair has been in an uptrend for quite some time now which would make you foolish if you were to try to sell it.
  • In the signal chart, you have to search for an appropriate buy signal for EUR/USD. Use an indicator like the commodity channel index, which in this example, gave a buy signal as it crossed from below -100 to above -100.
  • Finally, identify the appropriate time to buy EUR/USD by looking at the timing chart. When the trading signal from the signal chart matches up well with the currency movement in the timing chart as well as the trend on the trend chart, it gives you more confidence about the success of the trade.

By following multiple timeframe analyses, traders get a more wholesome point of view of the market that can lead to increased trading success.