Tuesday, May 19, 2015

Using Multiple Time Frames in Trading

TickLearner has sent in the following comment:

Quote

Pleasure to read a bit from you after a long time. But as a trader, at times, I get confused, shall we follow the trend of the trading chart or a time frame above the trading chart.

Whats your advice on this.

UnQuote

This is an interesting question, which I will try to answer by explaining how I look at multiple time frames.

The Theory:

There is a chart which we use for our trading. For swing traders, this could be a 60 minute chart, an End of Day chart, while for day traders their chart could be for 5 minutes or 15 minutes. This is called the trading time frame chart.

Now, common sense tells us that bull markets are driven by long term investors.  We can be sure that long term investors use weekly or monthly charts for their decisions. The five minute or even the 60 minute chart is of no use to them.

Suppose, I am a trader who uses 60 minute charts to decide on swing trades. If the weekly chart is in a sustained up move, then my bullish trades are likely to be more rewarding than my bearish trades. In other words, the higher time frame - that of monthly or weekly charts controls my trading time frame.

Thus, even when I am trading on 60 minute charts, I should be aware of higher time frames which control my swing trades.

To sum up, my trading time frame is used to decide on my entries and exits while a higher time frame is used to decide on the direction of my trading. This is the theory.

The Theory put to Practice

Then, if I am trading on 60 minute charts, I also refer to end of day charts which are the higher time frame for me. I determine the trend on end of day charts. Then I trade in my time frame (60 min) only when the trade is in the same direction as the end of day chart.
For example, if the EOD chart trend is UP, then I take only buy signals in my 60 miute chart.

The Problems

Like most technical analysis ideas, the theory is much easier to understand than the actual implementation.
Suppose the market is bottoming out. The daily trend remains down, but there are many buy signals on the 60 minute. I have to leave ALL the buy signals until the end of day chart does not turn up.

We could have a more complicated setup: Weekly is turning down, Daily is turning UP, 60 minute is turning down. Now, what IS the higher time frame saying?

My Answers:

I like to keep trading simple. I stay with the trading time frame. That is it!

Sometimes I see a pattern on a higher time frame which I wish to trade. Then, I switch the time frame. The higher time frame actually becomes my trading time frame for that particular trade.

 Finally, there is no hard and fast rule in trading. What works for you is good enough.

Questions and comments are welcome. 

[Please: no abusive comments. If you do not like my blog or my words, you do not have to read or listen.]

5 comments:

Ajit Pandey said...

thanks for very useful blog...,
but sir i am confuse here -- "I like to keep trading simple. I stay with the trading time frame. That is it!"

sir, in which time frame you will stay ???

Ajit Pandey said...

thanks for very useful blog.. but sir i am confuse here -- " I like to keep trading simple. I stay with the trading time frame. That is it!"

sir in which time frame you will stay ???????????????

daytrader said...

true sir ,,, this is the basic but some times even active traders forget or rather disciplined trader forget ,,, certainly a worth reading to refresh the basic,,

Nirav said...

Sir,

In trading we have good times and we have bad times. My question to you is How do you maintain confidence in your self as well as in your strategy when you are suffering from large draw-downs?

Thanks.

Eagle Watch said...

Sir,your are active in market from so many years. Lot of people see you as their guru. Would you pls let us know..what according to u are most rewarding trades I.e. Intraday or swing or long term. Pls answer based on your till date earning returns.

Also would like you to share on weekly basis at least a chart where you took trade n share the reason of initiating it. It will be of a great learning experience for lot of people who follow you.

Regards,
Sailendra Sharmaa