Compensating for Price Bar Inconsistency

It’s typical for new traders to fall victim to various “newbie” pitfalls. Some of these include: overleveraging, poor money management, poor choice of technical studies to use, etc. The good news is that many of these pitfalls can be avoided because traders have direct control over these things once they learn how to avoid them. A factor that traders don’t necessarily have control over are technological limits/infrastructure especially as it applies to charts of the FX market.  

For example, because the spot FX market is a decentralized market, the bar-to-bar price action on charts could differ depending on the market maker and/or pricing source you do business with. This means that depending on the timeframe of the chart you analyze and the source of the rates for that chart, it’s very possible that the way a candlestick bar forms on the screen for one trader will be different for someone else…yet, both traders are looking at the same exact currency pair. 

Imagine, one trader might see a Doji (sign that upside move might be losing steam) form on their candlestick charts but another trader within the same circumstance will not. Which trader is seeing the correct candlestick bar chart? The answer will surprise you…neither trader’s charts are right or wrong. This is simply a reality of the market and the nature of how the data is displayed by each chart provider. So how does one analyze charts effectively in this market under these conditions? 

There are a couple of things one can do to help minimize the impact of this type of display inconsistency… 

First, study charts of larger timeframes. Not only does the price action have less “noise” on larger timeframes (i.e. Daily or greater) putting you in better touch with real moves as they occur, but the way candlestick bars are drawn will involve less variation between charting providers since we’re talking about bigger moves in the market where a few PIP’s difference between price sources won’t amount to much of a visual difference on each candle bar. Whereas a few PIP’s difference on smaller timeframes may result in very big differences on how individual candles are displayed across different charting providers effectively making your analysis of those charts useless or at best inaccurate. 

Second, get used to eyeballing price action as a whole and not focus too much on individual price bars. Though it’s important to try and detect the clues that individual bars might reveal, you shouldn’t read too much into any one particular bar knowing that it’s possible for bars (especially on smaller time frames) to be giving you an incomplete picture. It’s much better to take individual bars and compare relative to “big picture” recent price history/action in order to determine if what any one or set of bars might be indicating makes sense relative to the broader price action. 

Following these suggestions won’t eliminate the impact of this and other similar discrepancies entirely. But what they will do is help minimize them to the point where you become less dependent on individual bars and increase the chance of you avoiding misinterpretation of what you’re seeing on the screen based on price bar display inconsistency. This should help you identify trading opportunities better regardless of what charting provider or price source you use.

This entry was posted on Tuesday, January 8th, 2008 at 9:10 pm and is filed under Use Charts Better. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.