How Using Market ‘Memory’ of Forex and CFD Charts Helps Traders

March 26, 2017 07:30

zoom 5.png

Dear Traders,

Do you look at the charts and wonder how much to zoom in or out?

It's a valid question that deserves our time and attention today.

This article will discuss the pros and cons of using zoom, but we'll also discuss best equilibrium for chart viewing.

We will review the impact of zoom on traders view and perceive the charts first of all.

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What's the impact of zoom?

How traders view the Forex, CFD and financial markets can be substantially different depending on how much traders zoom into or away from the chart. Please realise that the price action itself does not change in any way shape or form. It is our view of price that changes with the level of zoom.

Simply put, price always remains the same but a trader using zoom will change their perception. For instance, a trader who zooms into the maximum will see the least price action available from that time frame.

When trader zooms into the chart then they are in fact making time more "spacious", which means that less history is visible. In other words, the left side of the chart reveals less of the past - see image below for an example.

zoom 1.png

The opposite happens when traders zoom out when viewing their charts. The same time frame from the same currency pair in the Forex market, however, looks totally different when a trader zooms out as much as possible.

Candles have less distance between each other, and the chart is squeezed closer. The left side of the graph goes further into the past and more history is revealed, which can impact the price axis as well (if price auto adjusts to the top and bottom of the visible candles). See image below for an example.

zoom 2.png

Trader tip #1: there are two ways to change the zoom. One way is to click on the minus-magnifying glass sign to zoom in and the plus-magnifying glass sign to zoom out. The other way is to click anywhere in the time scale (at the bottom) and drag to the left to zoom out or drag to the right to zoom in.

Trader tip #2: you can check the number of bars visible in the chart without actually counting them one by one. Click on a candle (with left mouse button) on the left and drag to the right. The first number visible when dragging is the number of candles (the second number is number of pips and third number is price level).

zoom 3.png

Pros and cons of zooming in and out

Both zooming in and out have their own disadvantages (cons) and advantages (pros).

Let's start with zooming out:

  1. The advantage of zooming out is that traders see more of the past. This equals to more information being available such as support and resistance levels.
  2. Another pro is that the trader has an enhanced overview of price movement, trend, patterns, and technical levels.
  3. The disadvantage is a potential information overload and the fact that the chart can become difficult to read.

Here are the arguments for zooming in:

  1. The advantage of zooming is is that traders are able to see current and very recent price action with very clear clarity.
  2. The disadvantage is the lower amount of information in terms of trend and support and resistance levels.

The question comes up: Is there an optimal chart setting for time?

The answer is yes.

Optimal balance: market memory

There is something called "market memory", which can be considered the 'ideal' way of chart viewing.

Market memory means that there are 100-200 candles visible on the chart. Or in other words a chart should show 100 to 200 units of time (of the chosen time frame). The same number remains valid for all time frames.

For instance, a daily chart would ideally show 100 to 200 daily candles and an one hour chart would have 100-200 one hourly candles visible. In the chart below 185 daily candles are shown.

zoom 4.png

This is called market 'memory' because:

  1. everything that is visible on the chart is considered important and relevant for current trading decisions
  2. anything that is not visible on a chart is considered less significant.

Over time, I have developed my own "zoom style" depending on lower or higher time frames.

Higher time frames – I tend to use a bit more spacious approach. For a daily chart I certainly do not mind looking back an entire year's worth of trading and for a weekly chart I often look at the last 5 years. In those cases there are 260 up to 370 units of time visible depending on which monitor screen is used.

Lower time frames – I generally stick to the market memory rule and I make +/- 150 to 180 bars visible (again depending on the screen) for charts below the daily chart like 5 min, 15 min, 60 min and 4 hour charts.

Of course, it is up to you to find out the style that suits you best - you can test these ideas on the MT4 platform.

Cheers and safe trading,

Chris

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