Directional Trading & Higher Time Frame Confirmation - by Jay Norris is the author of Mastering the Currency Market

Directional trading, also known as discretionary trading, is what most retail traders strive to succeed at. In this type of trading the traders attempt to figure out the market’s current direction, and either position themselves in that direction at the most opportune time, or wait till the market changes direction and position themselves to be able to profit from a continuation of this new direction. Contrary to what most beginning trader’s think, most traders who work for investment banks or proprietary trading shops are not directional traders.

Many traders employed by investment banks and prop shops are mechanics trained in the use of counter-trending methods who continuously scan markets in search of those times when one market price gets slightly out of line with a related market and they position there firm’s money in those markets so that when price snaps back into line they profit. They’re method is called arbitrage, and if they can borrow money at 2.6% and make 5 or 6% in their trading operations they are very profitable. The big investment houses in London and New York also employ traders called market makers. This is the trading category that most professional trader’s fall into today. In many ways they aren’t traders by most old school trader’s definition at all. They are computer programmers who write and service the programs that investment firms and trading boutiques use in an attempt to take the other side of every trade you and I make. When you read stories that the investment bank Golden Stash made money every day of the previous quarter it does not mean that they have the secret on how to pick and train traders, it means that Golden Stash’s market making operations managed to book, or get on the other side of a lot of trades and then offset those trades at a sliver of a profit. Big investment banks and prop trading shops aren’t interested in directional trading because it does not make sense from an odds maker’s perspective. The average directional trader places the odds against herself every time he buys or sells at the market. The minute she hits the button to enter a trade by buying the offer, or selling the bid, she gives up an edge. Professional market makers or arbitrage traders never, or rarely give up the edge of buying on the bid and selling on the offer They are not in business to predict where a market is going to move to next, they are in the business of buying the bid and selling the offer, and they want their computers to do that for them thousands of times a day in a hundreds of markets.

We on the other hand, are not interested in that fractional edge. We would much rather play the opposite of that game and only trade once, or twice a day, but position ourselves in a market that trends in our direction all day, or two or three days, or two or three months. The way we attempt do this is by trading in the same direction as the higher time frame trends, and recognizing when those trends are shifting. Knowing how to use higher time frame charts to confirm a price signal on a lower time frame is an essential skill for directional traders and one which can reward you nicely once you master it. Many students will become impatient and take a trade that is coordinated on the lower time frames, and not on the higher time frames. This is a mistake and more often a waste of time, energy and more important money. While you may not always have all the time frames line up, there will be times when this happens. More times than not though, if you are trading an intraday chart and have the current trend on the daily lined up in the same direction, you are going to have the wind at your back. If you have the knowledge to identify markets where the intraday trends are moving in the same direction as daily and weekly trends then you are going to put yourself in a position to reap the trader’s reward.