Prices evolve in multiple timeframes. That is a fact of the market. Institutions and traders also view and analyze securities in diverse timeframes, and this creates the cycles of greed and fear that we’ve come to know as “The Markets Basic Atom”. Today’s advanced charting and trading platforms allow the trader to view and analyze these timeframes viewing several charts at one time, and this has turned out to be both a blessing and a curse to the trader, especially the novice in his early stages of development. Today we’ll discuss the right and wrong way to utilize multiple timeframes in order to increase your odds in whichever trading niche you are pursuing.
First, let’s talk about the wrong way to do this. Using and analyzing multiple timeframes can be a somewhat daunting task for the uninitiated trader, as so much information can and will often lead to confusion. First and foremost, we need to understand that any individual trading style has one timeframe that will be the main one we’ll use to enter, manage and exit such trade. But prices will also continue to fluctuate in shorter and longer timeframes. As the trader enters a trade in a specific timeframe (e.g. daily for Swing Trading), he/she often feels compelled to analyze the price development of that same security in shorter timeframes. In any of these shorter charts, there might appear to form a “bearish” reversal against his position, or a “juicy” move that he will feel compelled to profit upon. The problem is that anytime we decide to trade any individual timeframe, we need to understand that there will be “counter-trend” moves in shorter timeframes. But in order to capture a move suggested by an individual timeframe (e.g daily), we need to weather the market cycles on the 2, 5 and 15-minute charts. Using very tiny timeframes to manage positions in the manner just outlined will lead to a negative “Batting Average”, as your stops will often be based and respected in the longer-term chart, while your profits will also be significantly smaller on average.
On the other hand, the astute and educated trader uses multiple timeframes to select higher odds setups and refine his entries. The use of longer-term charts helps us to see areas of support (demand) and resistance (supply) that might not be visible in a shorter time frame It also helps us to observe the bigger picture, in terms of trends and setups. The best odds setups will usually have confirmation in multiple timeframes. What does this mean? It means that if you have a Buy Setup (BS) on a daily chart, you’d like to have a weekly chart just breaking above a multi-month consolidation, or at least in a stage 2 uptrend, with enough room to move into the next resistance area (or no resistance), and not too “extended” from the 20 Period Moving Average (20ma). If on the other hand, the daily BS occurs at Major Resistance (MR) on a weekly chart, after a Parabolic Sell Setup (PSS), then odds of a failure of the BS are higher.
Refining entries is another benefit of the efficient use of multiple timeframes. Imagine you have a daily BS, and then you could go down to a 60-min chart and find a suitable pattern to try to capitalize on that suggested daily move. In the Professional Trading Strategies (PTS) seminar, we teach our students the art of using shorter timeframes to enter into a security, once the longer timeframe forms a setup that suggests a move.
Multiple timeframe analysis is part of the Live Traders method of trading, but only done in a systematic and logical manner, and only for the right reasons. Some of the information I wrote about in this letter may seem a bit complicated to someone just starting out and if so, it’s important that you get an education in the form of trading or investing that you choose. Focus is paramount in any successful endeavor and it’s no different and in fact even much more important in the trading and investing world. Happy Trading!!
