How To Trade Multiple Time Frames

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multipe time frames for bigger pictureWe live in a time where many on any given city street will have their heads buried in their smartphone.

Totally oblivious to the world around them, some of these people have walked directly in front of oncoming traffic.

Whether driving, walking or riding a bike, more and more people are operating in a very closed environment unaware of what’s in front of them

Being in your own personal bubble can have a range of effects because you are missing the bigger picture outside of the one foot space between the face and the phone.

If we think of this in terms of trading, the truth of it is not lost and that is where multiple time frames can be used.

 

Multiple Time Frames

In trading, what you can’t see can hurt you and there is no better way to protect yourself than to see what lies ahead.  Much like looking up as you walk down a city street to avoid walking in front of truck, multiple time frame trading can show you what you are trading into.

Dr. Alexander Elder talks about the triple screen trading system and when I began trading, I latched onto the sense of it. I have my own version of the time frames involved but the use of multiple time frames was too sensible to ignore.

You will have a chart where you look for all of your trading setups on.  In this example, we are going to use a daily chart for our trading setups.

multiple time frames setup chart

We are looking at a market that was in an uptrend on this time frame and our trend line (demand line) is drawn according to the description in my trend line blog post.

The top of the move is interesting as price pushes through the highs, fails to gain ground as shown through the failure test and then proceeds to our demand line.  Price action shows us bearish action and the green candles are showing that the bulls are still trying to push through.

Our setup is a broken trend line and the failure test of the highs shows that the bulls are unable to sustain this move at this point in time.

What we don’t know is where we find ourselves in terms of the higher time frame.

Is there any indication on a higher level that we are in fact turning over?

 

Context Time Frames

Just as it pays to know if you are about to step into traffic, it is never a bad idea to take a look at where you are finding yourself in the bigger picture.

In this case, we want to zoom out to the weekly chart. 

We are not looking for an in depth analysis but we would like to see if there is anything in the price action/structure that may make this trade not as inviting.

top down trading

This is a portion of the weekly chart but the overall move has been down for about 8 years and this move looks like a correction of the last large push down.

Fibonacci traders would also see that the high on the left of this chart is a 50% retrace of the prior decline.

Also not seen on this chart is a weekly demand line much lower which could mean there is potential in this trade and a reward to risk of at least 3:1 potential.

  • What we now can put together is the daily chart appears to be having a resumption to the downside.
  • This fits in with the overall move of the market as seen on this weekly chart.
  • There is room to run to the downside which will give us a reward to risk we can be proud of.

We want to look at position sizing which will be influenced by the difference between our entry and our stop.  We want our protective stop close enough to entry to allow a fair size position but also keep it out of the way of the noise of the markets.

 

Use Of Multiple Time Frames For Position Size

You can drop down to lower time frames as far as you like but for this example, I am going to use the four chart.  This gives a slightly less “noisy view” of price and structure.

multiple time frames entry

The first push through the trend line gave us our pivot as price had a slight retrace but failed to push lower. I would consider this more of a range than an actual retrace and retest.

When trend lines break, there is often a retest and the second push higher gives us something more resembling a retest of the trend line.

We also see something that adds weight to our intended short trade and that is another failure test as marked by the red line.

A range forms and breakouts can be a solid entry when taken into the context of a larger setup. 

In this case, all signs point to the downside and the failed test of the highs could be a wash of all the weak shorts and those looking to go long.

The bigger dashed white line shows the entry area after the breakout that occurs after the failure test.

Failing that, you could anticipate a break of the original pivot (the thin white line) and position in either when the market shows weakness or on the break of the low.

Because we are getting in on the four hour, we could use an 1 x ATR stop based on the four hour which could allow us a larger position than the daily would allow.

 

Multiple Time Frames Setup

This is a three time frame approach to trading and includes:

  • Setup chart
  • Trend determination plus structure
  • Trade entry

It is not a complete trading method however it does assist in ensuring you are setting yourself up for higher probability trading.

Combining these three often leads to some decent trading opportunities with a great potential to at least lock in some gains.

Much like people should get their faces out of their phones and take in the world around them, traders should also take the time to check out the view and multiple time frames can help you do that.

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CoachShane

Trader at Netpicks
Shane his trading journey in 2005, became a Netpicks customer in 2008 needing structure in his trading approach. His focus is on the technical side of trading filtering in a macro overview and credits a handful of traders that have heavily influenced his relaxed approach to trading. Shane started day trading Forex but has since transitioned to a swing/position focus in most markets including commodities and futures. This has allowed less time in front of the computer without an adverse affect on returns.

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