Trading the 4hr Charts

Posted on Dec 2, 2011 in Forex Strategies | 16 comments

The 4-Hour Chart

No, this is not a Timothy Ferriss promotion or new book, but an examination of the 4hr chart, along with the how and why I recommend using it for your price action trading.

If you are in the beginning or developmental stages for learning how to trade the forex market, I definitely recommend learning to read price action off the 1hr, 4hr an daily time frames.  For our purposes, we will concentrate on the 4hr chart.

Why Do I Recommend the 4hr Time Frame?

Price Action is the result of order flow (the total summation of all buy and sell orders).  It really matters not why people buy and sell, or if they are buying and selling, what matters is who has dominant control of the market, where is the market most likely to go, and how can we trade it.

With that being said, a few minutes of price action can more often than not, represent noise, a false move, perhaps Toyota buying some USD with JPY, and very likely have any significant force behind it to drive the market, bring in other players, and be the start of a big move.

Think about it…how many 1min, 3min, 5min, 10min, 15min, or even 30mins of price action throughout the day will really be representative of a major move and driving force throughout the day?

Now, think about the 4hr chart.  No matter how you slice it, 4hrs is half of a trading session (for the most part).  For any trading session, a 4hr candle will represent a large sum of order flow, sentiment, continued or sustained buying/selling, etc.  If a rejection happens on a 4hr chart, it likely represents a large rejection because to sustain that rejection, the market had to close the entire 4hr candle while maintaining the rejection till the end.  If it rejects during the 4hr candle, but closes exactly where it rejected, then it wasn’t that important because it couldn’t sustain that rejection in time.

Time is a critical component when reading price action and representing order flow.  The longer price reacts/rejects off a key level, the longer it holds from that rejection, the stronger it can be. Furthermore, if it can sustain the directional move for 4hrs as opposed to 5mins, then it had to do so through increased order flow and participation from the market.  That communicates there were more players and more money behind this move.

But on a 5min candle, or even a 1min candle, this could be nothing and represent little/meaningless order flow with no real potency behind it. It could be the result of some minor profit taking which creates a negative feedback loop in terms of order flow and price action.  But do this for 4hrs and sustain it into the close, and we are talking more participation, orders, money and participants.

For price to sustain a particular price action move for 4hrs means no matter how many players, sentiments, and ideas there were participating in the market, the dominant theme held for half the trading session and quite a long time.  But on a one min time frame, a 5min, or even 30min time frame, these moves could be simple noise which can move the market up to 30pips without having any major force behind it.  Think about how many 5min candles in between the NY close and Tokyo open and how much order flow will really be behind that?  Think about how many 1min and 3min candles will be between the 3rd and 4th hours of the london session (where volatility and pip ranges generally decrease) and how they will represent less order flow and participation. Then you will see how ineffective these candles can be and how what your reading has very little meaning.

One and Two Bar Patterns

Continuing with that logic, if a price action pattern, for example, an inside bar pattern (which is a 2 bar pattern) shows up on a 1min, 3min, 5min or even 30min time frame, it is much more likely to be absolutely meaningless than an inside bar which shows up on a 4hr time frame.

Think about it, if price holds inside the previous price range on a 5min candle, that could mean almost anything and be the result of a laundry list of order flow environments and situations.  5mins of price going nowhere could mean anything and have very little direction on upcoming order flow.

But apply an inside bar on a 4hr time frame, and you are talking 4hrs of price action being held in a range for almost half an entire trading session.  That means no matter how many players participated in the market, nobody was able to break the previous price range for an entire 4hrs which tells you a) price was pretty suppressed, b) very little directional control in the market, c) very little participation.  That is much more communicative in terms of information than any passing 5mins.

The market could be in a dominant trend, but be simply pausing for 5mins because its coming to lunchtime, there were some short term counter-orders/forces in the market that will be quickly absorbed, a little profit taking (again, a negative feedback loop on price action and thus, not great for trading). Technically, for an inside bar pattern, you would be basing your decision on 8hrs of price action since an inside bar pattern is a 2bar pattern (thus 8hrs), so there is a lot more information in this then an inside bar pattern on a 5min time frame (10mins of price action).

Furthermore, to get any real significant amount of data with confirmation and continuation of the order flow (and price action), you need far more 1min, 3min, and 5min candles to make sure the noise is filtered out. That means more moving parts and more variables to manage.  Contrast to the 4hr chart where one candle (or two) can give you all the information you need to make a trade while filtering out any noise and meaningless price fluctuations.

For an interesting story about meaningless price fluctuations, make sure to put in a question in the comment box below and i’ll tell you a story which will blow your mind.

In Conclusion

As we can see, when trading and reading price action, a 4hr candle will offer us much more information, have filtered out any meaningless noise in the market, and have a cleaner look and feel to it than any 1min, 3min or 5min chart.  This will make it easier for you in your learning process as you’ll be making decisions off of less false signals, more information and cleaner charts.

The 1hr, 4hr and daily time frames will have a greater communicative value about direction, clear support/resistance levels, what is a key rejection, who’s in control, while filtering out noise and meaningless order flow and price action. This will give you less confusing signals, teach you how to be patient with your trading, along with reading 1, 2 and 3 bar patterns.

Once you have developed your skills, have some experience and confidence under your belt, it’s really up to you from there how you want to trade, whether it be on the smaller time frames (1min – 30mins) or larger time frames (1hr, 4hr and daily).  At that point, it’s a question of style and life-style.

I prefer to trade the 1hr, 4hr and daily candles as they do not force me to sit at the computer like Johnny Bench waiting for the pitch or the gynecologist waiting for the delivery. This increases emotions, intensity, adrenaline & testosterone (horrible for your brain, central nervous system, kidneys, liver, etc.), while increasing the chances you can activate parts of your brain which are not conducive to critical thinking and managing risk.  For a great video on this, look at this video ‘Your Brain on Trading‘

Again, day trading is not bad nor incorrect, it’s simply a question of style and what kind of life-style you want to live.  But biologically it is healthier for your brain and body by trading the higher time frames such as the 1hr, 4hr and daily charts, which will give you a cleaner and more accurate look at price action and order flow.

For those of you wanting to learn how to read price action and the order flow behind it, take a look at our Advanced Price Action Trading Course where you will learn rule-based price action systems to trade the forex market.

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Also make sure to check out our most recent article on Price Action Trading.

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