- September 8, 2015
- Posted by: CoachShane
- Categories: Advanced Trading Strategies, Stock Trading, Trading Article
Multiple time frames analysis can be overwhelming for some. In one frame, we are in an uptrend while, in another time frame, we are in a downtrend.
Add in more time frames to check for “confirmation” and confusion can become so severe, people tend to simply freeze.
The issue is that there comes a time where the multiple time frames mesh and either the higher or lower time frame takes over.
Patterns in one-time frame take on a whole new meaning when looked at in the context of another time frame.
There is the belief that the higher time frame carries more weight but remember at any time, one time frame can take over and a turn over happens.
In this piece, I want to show you:
- How to draw different trend lines
- How to determine trend
- How to trade counter-trend using trend lines
Trend Lines And Trend
Since the trend on one time frame can become the dominant trend at any time, it’s not a bad idea to see where we are in the bigger picture.
Trend lines are good tools to use for trend determination and in the right hands can become a stand-alone trading tool.
Related – What Story Does Your Chart Tell You?
Not only can they help determine your trend direction, they can also point to the rate of the trend which is great information to have in terms of taking a trade.
In defining how to draw a trend line, we open an entirely different issue. Connecting swings in price can be subjective especially if we include internal trend lines.
The key is to be consistent at every turn when you draw the lines.
This is the standard way of drawing trend lines and because we are using the same anchor for different swings, this is known as fanning a trend line. Trend lines define the relationship between the swings that are used and are useful to determine an accelerating or decelerating trend.
- You can see how the lines start off steep and slowly begin to decrease in the steepness of the line.
- Smaller trend lines marking off the corrections are short term trend lines and can be useful in determining a trade entry
- Internal trend lines also offer opportunity in terms of trade opportunity as they can be useful in an early warning of trend reversals
One way you become more objective in trend line usage is to only connect to obvious swings and only after a high or low is taken out.
Multi-Time Frame Trend Line Usage
The drawing of trend lines is not very difficult and now the question becomes; how to use that information to aid us in our decision making.
Drawing lines on the higher time frame charts is simple as you have fewer swings to deal with. The chart below has a daily down trend using trend lines (not seen due to space limitations) and this is an intra-day chart using the one-hour time frame.
You can see we have a few more options as a number of swings has increased.
Keep in mind this is the 60-minute chart in the context of a daily down trend. The daily down trend has been determined by drawing trend lines over obvious swing highs.
- These dashed lines used to form down trend lines off and kept you on the short side intra-day OR provided targets for counter-trend trades. All three have been broken.
- We started to get higher swing lows which allowed us to draw up trend lines off the lows. Each time price met a down trend line, it gave inflection points for possible action.
- You can see the lines getting steeper indicating the rate of up trend was increasing in the context of a higher time frame down trend.
When the trend starts to increase, you can see the trend line is taking a sharper direction and in this case, we may be seeing a resumption of the overall down trend. One thing I hope you have noticed is that at each line, there is some type of reaction.
This does not always happen of course but it’s something to take note of.
Often times when a trend line breaks, it is simply moving into another trend rate that is either new or has been shown through an earlier trend line. Keeping in mind previous rates of trend plus the larger time frame trend, can help keep you from being overly anxious to jump into a move.
Trend Line Trades
I want to dial down into each point in time where price met one of the dotted lines. Dropping the time frame to a factor of four allows a better view of the action and possible opportunity around each point.
I have to reiterate that we are in a down trend on the daily chart which we objectively know through our trend line. I also must add that if we continue up from this current area, there is not a trend line offering an inflection point on the previous chart.
- After price breaks the lowest trend line, it reacts off the upper trend line.
- After reacting at #1, price returns to the break out price zone and offers a trading opportunity.
- Price breaks through the tested trend line and travels all the way to another trend line before…..
- Offering a pullback trade opportunity off a formed demand line.
- Price breaks up through the tested trend line and is now sitting at a make or break point.
The point is that even though we are a higher time frame down trend, usage of trend lines offered not only a time frame dependent up trend but also trading opportunities.
Your Trend Line Trading Plan
In a future piece I am going to expand on the usage of trend lines including channels. For now, take it upon yourself to lay out a trade plan using the trend line information found above. It may not be a plan you trade, but it will give you great insight on how valuable trend lines can be for your trading and may find its way into your trading.
Trend lines can help you define the strength of a trend, if a trend is even present, and perhaps give you a signal that the current move is coming to an end through an parabolic push. Just be consistent and clear with their usage.