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Monthly Time Frame Is the King

In 2009, a friend asked for my advice on buying and selling Euro against Canadian Dollar and visa versa. He had a trading bank account somewhere, and as his account balance was relatively high, the bank agreed to offer him a good deal in converting these two currencies to each other (because usually banks charge you over 200 pips when you change the currencies).

I asked my friend to come and sit next to me, so that I could show him what I could see on the charts and give him my reasons about the very important advice I wanted to give him. When he came, I told him that the answer of his question was only one sentence: Do nothing but going short on EUR/CAD.

He had Euro in his bank account. Going short on EUR/CAD meant that he had to sell Euro against CAD. It means he had to change the Euro he had in his bank account to CAD and hold his money in CAD until Euro went down against CAD, as low as it could.

The question is why did I advise him to do that?

The way that he wanted to trade Euro against CAD, was not like what retail traders do. He couldn’t sell EUR against CAD today and change his position tomorrow. That was not possible for him, because he did not have access to a trading platform. He had to call the bank and ask them to handle the currency conversion for him (the bank did not allow the exchanges to be done through online banking for the security reasons). Additionally, although the bank had agreed to offer him a low spread, the offered spread was still high, and so he had to be careful about the number of exchanges.

I considered all of these factors, and gave him a piece of advice that could make thousands of dollars or euros for him, through a few exchanges.

I checked the EUR/CAD monthly time frame, and showed him the very strong short trade setups that were formed on EUR/CAD monthly chart at that time. I told him that if I were him I would do nothing but selling Euro against CAD. The short trade setups that were formed there, were almost among the strongest setups I had ever seen. Having such strong short trade setups on the monthly chart, meant strong down movements for thousands of pips.

Please follow me on the below chart.

When my friend referred to me, the short trade setup that was formed by candlesticks #1 and #2 (I mean the December 2008 and January 2009 candlesticks on the monthly chart) was already formed, and candlestick #4 was about to close. Candlestick #4 which is the April 2009 candlestick on EUR/CAD monthly chart, was closing as a strong bearish candlestick and its combination with candlestick #3 was making another strong Bearish Engulfing Pattern after the first Bearish Engulfing Pattern that was formed by candlestick #1 and #2.

The first trade setup formed by candlesticks #1 and #2 was a very strong Bearish Engulfing Pattern, with a strong Bollinger Upper Band breakout. The candlesticks’ sizes, specially for candlestick #2 was terrific. Above all, a strong “W” or Butterfly Pattern was formed before this trade setup. There was only one negative point for that trade setup, which was the relatively strong bull market that the trade setup was formed on. There were some strong bullish candlesticks, and Bollinger Upper Band was pointing up almost sharply. In spite of this, the candlestick pattern was so strong by itself.

Luckily, the first trade setup was followed by the second one, which was the candlesticks #3 and #4 trade setup. This second trade setup had already confirmed the first trade setup, and if the candlestick #4 closed as a big bearish candlestick, then we could easily ignore the negative point of the first trade setup.
I told my friend that he was so lucky because of having these strong setups on EUR/CAD chart. I asked him to wait for the candlestick #4 to close (it had only a few or few days to close), and then sell EUR against CAD and hold the position until I tell him what to do. I remember that I told him that it was possible to see some bullish candlesticks after this (specially on the shorter time frames like daily and weekly), but they would not be any problem, because the price eventually follows the direction that the monthly time frame is pointed to.

He sold EUR against CAD and made 3380 pips after 38 months. Let’s say he changed €2,000,000 to CAD when EUR/CAD was 1.5880, and so he hold $3,176,146 CAD in his account (banks don’t offer any leverage to the bank account holders). After 38 months, EUR/CAD price lowered to 1.2500. Then he asked the bank to convert his CAD to EUR. They did it and his €2 million initial capital turned into €2,540,916. About €540,000 profit in 38 months, without any leverage.

Butterfly Pattern on EUR/CAD Monthly Time Frame

Why I was sure that EUR/CAD wouldn’t go higher? Was it only because of the trade setups that had been formed on the monthly chart?

Yes, it was because of the strong trade setups and candlestick patterns I saw on the monthly chart. I could not advise him to sell EUR against CAD if those setups were formed on any of the shorter time frames. Why?

Euro was officially introduced as a currency on 1st January 1999. Euro value went down against CAD, and it turned around and formed a support level by 2000.10.01 and 2001.07.01 monthly candlesticks. After that, it went up for a while, formed a high at 1.6989 on 2004.02.01 and started going down again.

Later on, EUR/CAD went up again and reached the 1.6989 level, and even broke above it (the upper shadow of candlestick #1). But, two strong short trade setups formed by candlesticks #1 and #2, and then #3 and #4, below the 1.6989 level.

If it was on any other time frame, EUR/CAD could still go up and form another high. However, the price range between 1.2431 (formed by 2000.10.01 monthly candlestick) and 1.6989 (formed by 2004.02.01 monthly candlestick), was all the money that could flow to this market. It was the highest possible volume of the money that could be in this market, according to the current world economy situation.

It means, when there are strong short setups on the monthly chart, like what the candlesticks #1 and #2, and then #3 and #4 formed, this market had no way but going down, because it was really the end of the fuel that EUR/CAD could have in her tank. No money was ever supposed to be injected to this market from another planet. So EUR/CAD had to go down.

This is what the highs and lows of EUR/CAD monthly time frame, and also its strong setups tell you. No other time frame gives such an invaluable information.

EUR/CAD Highs and Lows on the Monthly Time Frame

Now, let’s take a look at the trade setup formed on NZD/USD monthly chart.

A very strong “Dark Cloud Cover” formed on NZD/USD monthly chart:

NZD/USD Monthly Chart Short Trade Setup

Our short position based on the above short trade setup on NZD/USD monthly chart is over 600 pips in profit now:

(this article was originally published on Sep 27, 2014).

NZD/USD Monthly Chart Short Trade Setup

Conclusion:

Monthly time frame is the KING 🙂

When there is a strong trade setup on the monthly chart, shorter time frames have to follow, even if sometimes the price fluctuates and goes against the monthly chart trade setup on the shorter time frames.

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68 thoughts on “Monthly Time Frame Is the King
  1. dragan says:

    Hi Chris,

    Could you comment a monthly setup on AUDCHF? It looks like its forming Dark Cloud on middle band on retrace in downtrend(if it finishes like this)…Weekly also broke the middle band after last week indecision.

    Thank you for the article.

    lp
    Dragan

  2. singh says:

    Hi Chris,

    Thanks for analysis. Few questions

    1. I noticed that that was triangle formed on EURCAD monthly chart
    http://oi57.tinypic.com/2yv6q68.jpg

    I remember you said when `triangle squeeze`happen we don#t know where the price will go. But I assume that the setup was too strong to take care of that?

    2. Based on 2008/Dec and 2009/Jan candlestick you said it is strong setup. However 2009/Jan candlestick does not completely engulf 2008/Dec candlestick. Wouldn`t that be a negative point ?

    3. This setup had one of the strongest downfall. But normally that is rare. At what point do you close of the positions like this ? Example, do you close out when you see first Doji, or Bull candle or Bear candles getting small etc. ?

    4. On separate note, I also see `triangle squeeze`happening on GOLD monthly chart. What are your thoughts ?

    5. Sometime there are also false signals. How do you think we should handle these ?
    a) GBP/USD monthly chart : 2003/Jan and 2003/Feb Candlesticks
    b) USD /JPY monthly chart : 1997/Apr and 1997/May Candlesticks
    d) USD/JPY monthly chart : 2005/Nov and 2005/Dec Candlesticks
    e) USD/CHF monthly chart : 2000/Oct and 2000/Nov Candlesticks
    f) USD/CAD monthly chart : 2001/Mar and 2001/Apr Candlesticks
    I am referring these because if you open positions like these based on monthly charts then you can get stuck on market for long time unlike daily/weekly ones, you get out in shorter time frame and open another ones.

    Again, thanks for all this analysis. I read your articles word by word and really enjoy it.

    • Chris says:

      Hi Singh,

      1. It is not a good, typical and visible triangle. Yes, the two Bearish Bearish Engulfing patterns were strong enough to affect everything on the chart.

      2. No, that is not a negative point. The 2009.01.01 candle was strong enough. It is an inside day candlestick too.

      3. I close when the first strong reversal setup forms. It doesn’t have to be a 100 setup of course.

      4. No. There is no triangle there.

      5. That is very simple. We take the 100 score setups only.
      a) had to be ignored because formed right on a strong bull market.
      b) same as (a).
      d) not a strong setup at all. The 2005.12.01 candle has a long lower shadow and the candlesticks sizes was not big enough.
      e) had to be ignored because formed right on a strong bull market.
      f) not a 100 score setup because it was formed when bulls were still strong.

      So none of the setups you listed were 100 score setups.

  3. Otto says:

    This is so great, thank you.

  4. pete says:

    You never cease to amaze me at the time you spend answering our questions. Love it! Thanks Chris.

  5. behnam says:

    hi chris. i have a question in time frames
    daily time frame is clear. opening and closing in a day. there is no matter daily is Monday or Friday. weekly time frame is more important to identify. it should be formed in a duration of a week not in the last five days. it should viewed from Monday to Friday. seeing the weekly candle in the middle of the week because of the candle has not formed completely is not right analyse. should see the weekly candle at the the end of week.is it ok? what about montly time frame?monthly candle show us the integrated of 4 weekly candle and the right way to see monthly candle is at the end of the month. what can i do if i want to see the monthly candle when i am in the middle of the month? seeing the monthly candle in the 15th of the month and analyse based on could be right decision? thanks

    • Chris says:

      Hi Behnam. We check the candlesticks when they are closed, no matter what the time frame is. We should check the monthly candlestick at the beginning of the month that the last month candle is closed and the new one is opened. What the new candle will do, doesn’t matter, as long as it is not closed yet. We have to see how the last candle is closed. This is what I did with NZD/USD trade setup too. I informed people about the formed Dark Cloud Cover when the July 2014 candlestick was closed, and the August candle had just opened. I did not talk about the August candle in that article. I talked about the Dark Cloud Cover that the July candle had formed:
      https://www.luckscout.com/is-the-nzdusd-downtrend-already-started/

  6. behnam says:

    hi and thank you so much

  7. orion says:

    Great post, my trading improve cause of your article on LuckScout.

    Thanks master.

  8. Tom says:

    Hi Chris, today I see bearish engulfing on weekly time frame CHFJPY, with
    H BB breakout, it is on side way market, bulls looking exhausted, what do you think about it ? Thank you

    • Chris says:

      Hi Tom. Candles are not that strong. And it is not formed on the sideways market. It is formed on a consolidation after a too strong bull market. It seems too risky to me.

  9. Rumen says:

    Dear Mr Pottorff,

    I would like gauge the setup I see on CHF/JPY weekly chart :

    1) it is a bearish engulfing pattern,the sizes of the two candles are good compared to the previous candles on the same chart (only 2014.09.07 candle is bigger);

    2) the two candles BUB breakout is very good,also 2014.09.14 bullish candle has quite long upper shadow;

    3) this short setup is formed after a strong uptrend when the market is already ranging, I think Bollinger Bands are already poining down.

    I would give this short setup 95 , because there ARE some bigger candles on the same chart,especially 2014.09.07 bullish candle.

    One thing that bothers me to enter is that I am already short on another JPY cross currency pair.

    I would appreciate having Your opinion on my gauging result ( not an advise to enter or not ).

    Thank You !

  10. simon says:

    Hi, Chris,
    Thank you once again for your kind guildance all this while.
    I was also watching the week closed on CHFJPY. Like to add some observations and get your valuable comments.

    I ignore the setup of CHFJPY closed on2014.09.21.
    Positive point – (1) look enough upper shadow of the breakout candle.
    Negative point – (2) Breakout of both candle not far enough away from the upper BB. (3) Breakout happened at the up trend of a ranging market (4) Breakout candle of last week just break the trend line resistance, and the current closed setup candle is re testing the trend line again. Hence, I told myself, let watch if the next candle break this resistance trend line turn support ?! or otherwise !!

    • Chris says:

      Hi Simon. You are welcome and thank you too.
      You are right about the CHF/JPY. It is not a strong and perfect setup. Going short is too risky at the of such a strong uptrend, while it has formed a consolidation that can be the trend continuation signal.

  11. Rumen says:

    Hi Cris,
    I checked GBP/CAD.

  12. Rumen says:

    Hi Chris,
    I checked GBP/CAD which I know is our baseline for 100 setup. Now I can see some differences :
    1) GBP/CAD was ranging for such a long time ;
    2) The bearish candle there is MUCH stronger ;

    Maybe what I see as a ranging market on CHF/JPY weekly chart is actually consolidation before another uptrend.

    Thank You for being so kind to answer all the question, that we – Your hard working students , are addressing to You. I really feel myself lucky that I am part of all this !

    • Chris says:

      Hi Rumen,

      You have done a great job. You understood what I wanted you to understand. Congratulations!

      So these two trade setups are really different. While CHF/JPY is a weak and risky setup that has to be ignored, GBP/CAD was a too strong setup that had to be taken.

  13. lg viswanath says:

    Hi Chris, first of all, a huge thanks to you for publishing such wonderful articles relating to candlestick analysis. I have started to learn technical analysis in the hope of becoming a full time trader one day eventually. can you please guide me as to how to go about doing it in few steps, should i start with candlesticks and learn it as much as possible in conjunction with bollinger bands. can you please also elaborate on what are the time frames for the charts that i need to use as well, please help.

    • Chris says:

      Hi Ig,

      Thank you for your comment. I think your questions are all answered in the below article. Please read it carefully and let me know if you still have any questions or problems:
      https://www.luckscout.com/become-a-profitable- -trader-in-5-easy-steps/

      • lg viswanath says:

        Hi Chris, hope you are doing fine, i am following all your articles very closely and find it to be very useful as it is explained in simple steps with lot of illustrations. As suggested by you, i am in the process of going through the link of how to become-a-profitable- -trader-in-5-easy-steps/, i am sure these would work in any market, but just wanted your advice as to whether i need to tweak or adjust it to stock market as I first intend to trade in India stock markets, or whether I can apply the same principles in stock market as well.

        In the process of listing down my other queries which I will ask once I go through all the invaluable material that you have put on the site.

        Regards, LG

        • Chris says:

          Hi lg. Thank you for your comment.

          You can use our strategy on any market as is. Candlesticks’ forms and patterns are the real time voice of the markets participants (buyers and sellers or bulls and bears). They work on all markets.

          • lg viswanath says:

            Hi Chris, hope you are doing fine. When we have bollinger bands as one of the indicators, is it safe to assume that the middle line (which is the 20 day sma) is the support and resistance line and there is no need to plot a separate chart for this purpose, basically on a strong trade set up wherein in the dark clould cover or piercing line, would the middle line of the bollinger band be the place where we need to book profits or move the stop loss to. regards LG

          • Chris says:

            Hi Ig,

            Bollinger Middle Band works as a support and resistance. There is no doubt about that. However, we’d better to plot the support and resistance lines based on the price highs and lows. That is a big help to locate or validate the trade setups.

          • lg viswanath says:

            Hi Chris, am I right in assuming that strong trade set up’s are basically only (i am emphasizing on the word only) reversal patterns which occur either through dark cloud cover/bearish engulfing or piercing line/bullish engulfing, both the candles have a strong piercing line either through the upper or lower Bollinger band and the trade is taken when it is not a strong bull or bear trend. (use the support or resistance lines for booking profits) Can i follow only these conditions religiously and ignore any other trade set up’s (however tempting it might be) and yet get enough trades in this set up on a monthly basis.

            Regards, LG

          • Chris says:

            Hi Ig,

            You are absolutely right. However, I don’t know what you mean by “enough trades”. The number of trade setups can be different from month to month. We will be happier to have more setups, but all we can do is waiting for the setups to form.

          • lg viswanath says:

            Hi Chris, thanks for confirmation, yes, it all depends on the discipline of waiting for trade to happen, to increase the frequency of such set up’s if i were to trade in stocks, can i follow a set of stocks (say15-20) and track them closely for such set up’s. also if i were to take the daily chart for set up’s what would be the time frame chart to be used for support and resistance levels for booking profits (is it bollinger middle band), also will the stop levels be the low or high of the confirmation candle, regards LG

          • Chris says:

            Hi Ig,

            You are welcome.

            Yes, you can use this system for stock trading exactly as is. Everything is the same. It works perfectly with the long time frames like daily.

          • lg viswanath says:

            Hi Chris, with regards to perfect set up, i am still having confusion as to how to determine the market set up when dark cloud cover and piercing line positions are formed so that those trades are avoidable when it is a bull/bear market. can you please help in clarifying in regards LG

  14. L G viswanath says:

    Hi Chris, adding slow stochastic to candlesticks and bollinger bands would it help in additional confirmation or is that purpose served by bollinger bands itself especially if it is a reversal trade. regards LG

    • Chris says:

      Hi and welcome to our site.

      No, it doesn’t help at all. If you learn to pick the strong candlestick patterns, you don’t have to get any confirmation from any indicator.

      • L G viswanath says:

        Hi Chris, in one of your articles you have mentioned that positions can also be taken in an evening star/ morning star kind of scenarios after the confirmation candle depending on the market conditions (whether it is formed in a strong bull/ bear market), would you be comfortable initiating trades and get the same confidence level you get by trading using a bullish/bearish engulfing or a dark cloud/piercing line type of pattern. also can you kindly publish more articles on how to trade the middle bollinger band level as I am not fully clear. regards LG

        • Chris says:

          Hi,

          Trading the evening star/ morning star depends on the confirmation candlestick. If it engulfs the previous candlesticks strongly, then we can go for it.

          Sure, I will talk more about the middle band.

          • L G viswanath says:

            Hi Chris, thanks for the clarification , looking forward to more articles on middle band. Also can you help by sharing the link which would give examples or exercises which would test our understanding of the market set ups. regards LG

          • Chris says:

            You are welcome. Sure, I will have all of this into consideration.

            Regarding the middle band, I’d like to mention that almost in all of my posts I talk about it, because many of the charts I analyze have something to do with the middle band. Therefore, if you follow my posts, you will learn something new about the middle band every day. In spite of this, I will do my best to have specific articles about middle band as per your request.

          • L G viswanath says:

            Hi Chris, when the confirmation candle is formed, can we take the position just before the end of the market (say a minute or two before the market close) or should we enter only at the open price of the next day. If we enter only the next day open price dont we stand a chance to loose on the possibility of gap in price (up or down depending on the position). regards LG

          • L G viswanath says:

            Hi Chris, if i were to trade using daily chart, how many past days data should be taken (a) to plot resistance and support and (b) to determine whether it is a bull/bear/side ways market, the reason for asking this question is that the trend of the market can change depending on the time frame, regards LG

          • Chris says:

            Hi L G viswanath,

            There is no special number. We have to locate the strongest and most visible high/lows to plot the lines. Also, we have to wait for the strongest candlestick patterns to form.

          • Chris says:

            Hi L G viswanath,

            You can take it before the market close on Friday afternoon. However, you have to be aware that if the swap is against you, you have to pay for one extra night. Gaps are not always against you. In most cases it doesn’t make a big difference.

          • L G viswanath says:

            Hi Chris, when we set up the stop loss, should it be the closing /opening price of the confirmation candle or the shadow of the confirmation candle. also with regards to the stop loss should we exit the position when the stop loss price is hit or wait for the candle to close at that price, regards

          • Chris says:

            Hi,

            1. It depends on the shadow and body length. There is no exact rule for it.

            2. You should exit when the SL level is hit by the price. We wait for the candlesticks to form when we are waiting for a trade setup to form.

  15. L G viswanath says:

    Hi Chris, while I fully understand that we need to wait patiently for the setup’s to be formed, can we also initiate trades when the bollinger middle band is broken by a candle on the upper or lower side, keeping the bollinger middle band as a stop loss. regards LG

  16. Shalewa says:

    Thanks for the article Chris.

    I wish to doublecheck 3 points pls.

    1) Since it takes a whole week and a whole month for the candlesticks to form on the weekly and monthly charts respectively, I take it that I can only open a trade on Fri 5pm est and the last day 5pm est on the weekly or monthly time frames respectively if there is a strong trade set up.

    2)How long do trades on weekly and monthly time frame run for on average?

    3) I also read here (LuckScout) that our stop loss should be wider than usual. Is the low or high of the candlestick not good enough? If not how do we judge the stop loss so the trade is not cut out when the market is volatile? Is it the Resistance line/Support line we use to calculate stop loss?

    Thank you very much.

    • Chris says:

      1- You can enter on Friday or Sunday afternoon.

      2- It depends. It is like the other time frames. They can be open for several candlesticks.

      3. No. We place the stop loss exactly like the daily chart. Just because weekly and monthly time frames have a bigger scale, the stop loss will have a bigger pipage.

  17. Steve Edwards says:

    If trading the daily time frame, do we need to consider what direction the monthly chart is moving?

    Thanks!

  18. Jae Task says:

    I am still playing catchup on all these articles and comments. There is such good information on here, I am slowly unlearning my previous lessons. This is such a better way to approach the charts and this adds a whole other level to the patience aspect.

    To wait a whole month for a candle seems insane, but actually it makes perfect sense. the slow movements mean huge pip swings.

    Thanks again Chris

  19. Oesha Roopram says:

    Great article.

  20. Nadi brh says:

    Thanks for the article Chris.

    Regarding the Dark Cloud Cover, why have you called it a strong short trade setup while it has not broken above the Bollinger Upper Band?

    I know that it is your experience that make you see the strong setups but under what condition can we regard a not-having bollinger band breakout?

    Many thanks Chris

    • Nadi,

      Under some very special conditions, we ignore some of the negative points that a trade setup. Hitting a too strong resistance level on the monthly chart can neutralizer a negative point like having no Bollinger Upper Band breakout.

  21. Len Ekenstam says:

    hi chris, you made the comment that the lesser time frames have to follow the direction of the monthly time frames. would you elaborate on this and show some comparisons using the charts of these time frames and show how they relate to each other? when i look at the monthly,weekly and daily frames i get totally confused and have no idea how to use what the time frames are telling me.open my mind please and lead me to the light. len

  22. Jeff Park says:

    Hi Chris – just responding re this which I had not seen before. You say – “However, the price range between 1.2431 (formed on 2000.10.01) and 1.6989 (formed on 2004.02.01), was all the money that could flow to this market. It was the highest possible volume of the money that could be in this market, according to the current world economy situation”.

    How do you know that it was the highest possible ever and no more money could go into the market please?

    • Jeff,

      That was the maximum level the price could go. At the same time, you couldn’t see any significant changes in any of the countries’ economies. It meant the capacity was the same and nothing was supposed to be changed. Therefore, the price could not break above the resistance level it had already created.

  23. Valdas Ly says:

    Hello Mr. Chris,
    Are you ok?
    Happy Easter!:)

  24. Ivan Todorov says:

    Hi Chris, I`m a bit confused about this setup. I know we should ask 1 question only , but I will save some time writing separate ones.
    Fallowing your strategy about BB breakout how could we know #3 and #4 candle is reliable setup when there is no BB breakout.
    Couldn`t candle #2 be considered as a harami which can be read as good signal considering the big timeframe?

    • ssy says:

      Obviously I’m not Chris and I don’t use this setup, but about your first question: from the article: “This second trade setup had already confirmed the first trade setup”, so candles 3 and 4 are looked at in the context of what had come just before them, giving them a lot of weight.

  25. ssy says:

    This article is a good example of how can be used as an investment. I have almost forgotten about this aspect of.

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