Use timeframes to your advantage

In the previous article, Find High-Probability Trades with Trend Combinations, you learned how to combine sub-trends to identify favorable trades. As we demonstrated, all of the important information you need to trade is already present within a single chart.

But there are times when viewing the same instrument through different timeframes (and charts) can also be used to your advantage.

For instance, pick a market and open up a 4 hour chart. You’ll notice that if you open up charts of the same market but in different timeframes—say, weekly, daily, 1 hour, 15 minute, 5 minute, etc.—that the different timeframes may exhibit different trend characteristics. Some timeframes may show an uptrend, another may show a downtrend, while yet another shows a sideways market.

How can you take advantage of using different timeframes? This is what we’ll discuss in this article. The basic principle is easy to understand. You can observe the different charts (timeframes) and wait for trends to be in agreement with one another. The lower timeframe will allow you to perfectly time your market entry.

Which trend is the right one to trade?

This is a very important question for a trend trader. In the case that you find yourself struggling, here’s some good news. When you combine two different timeframes in which both trends are in agreement, you do not have to think about trend size, progression or regression. You simply trade the current trend. All you need is to open a second chart to view that secondary timeframe. Essentially, you are combining the same trend in the superior and minor timeframe.

The key point here is to pay attention to different trend sizes. Once you identify the superior trend, you will notice that the minor trends will not always correspond to the superior trend. This incompatibility tends to be the rule rather than the exception. So, when you do find two timeframes whose trends agree, the trend confirmation can be much stronger. Note that there are many different timeframes (and different trends) that co-exist, so be consistent in using the same timeframe when analyzing trends!

Rule of thumb when combining timeframes

Here’s an important rule of thumb to remember: use the higher timeframe to determine the direction of the trend, and use the smaller timeframe to time your trend entry!

  1. Select the timeframe whose trend directionality you would like to designate as “superior.”
  2. Select the associated (smaller) timeframe as the minor trend and directionality.

The strongest interactions between the timeframes occur chronologically, as in the following examples:

  • Weekly chart vs. daily chart
  • Daily chart vs. hourly chart
  • Hourly chart vs. 10-minute chart

When combining two timeframes, you would trade from the smaller to the larger timeframe.

It’s wise to avoid jumping timeframe units! In other words, don’t trade the 10 minute chart into the daily chart without looking at the 1-hour chart. It’s possible that the daily chart may be in an uptrend, the hourly being in a correction, and the 10-minute exhibiting an uptrend. If you trade the 10-minute into the daily, chances are that you’ll be misled into trading into a correction which would have been evident only if you viewed the 1-hour chart.

But if all three consecutive timeframes are in agreement—e.g. the daily, 1-hour, and 10-minute—then you will have identified a high-probability trade. This scenario would allow you to fine tune your entries on two deeper time levels.

How to trade using timeframe combinations

If you look at the image, you will notice that the superior timeframe shows no confirmable trending movement. However, the minor timeframe shows an upward breakout following a consolidation area (symmetrical triangle). This minor timeframe scenario demonstrates how smaller timeframes can be used not only to fine-tune trades but to observe nascent trending movements.

At the left hand side can you see four candles that are a part of an existing uptrend in the superior time unit. They do not offer any information for classic trend trading.

But if you look into the minor time frame – right hand side of the picture – can you see a clear trend toward which you can apply the rules of Dow Theory trend trading.

Entry after a regressive trend has been broken by a sharp movement in the opposite direction

Look at the image below. You will notice that a regressive trend (downward) has formed—it has lower lows and lower highs. But then, price breaks above the last lower high. This indicates the possibility that the regressive trend may have ended. But should you immediately open a position? No.

Look at the green line: upon a break of the regressive trend, wait for another correction and place a stop order at the high of the new trend. In this manner, you will catch the breakout in the direction of the superior trend.

Entry after a regressive trend has been broken by a countertrend

The image below shows a slightly different scenario. The regressive trend is broken not by a sharp counter movement but by a gradual trending movement in the opposite direction.

For this scenario, in which a trend moving in the direction of the superior timeframe is clear, simply place a stop order above the most recent “swing high” of the regressive trend.

Unlike the previous scenario—in which the regressive trend is broken by a sharp spike—this scenario shows that a clear trend has already formed. And because of the presence of this trend, you increase your probability of catching an actual trend rather than a mere price reaction.

Define your targets

If you trade the superior trend (your largest timeframe) until it its end, you would be working without a defined target. But if your goal is to trade the movement out of a deep correction in the minor timeframe, you can set a target in the area of the current high (P2) of the trend in the superior timeframe. Set your target with a limit-order.

Position protection and stop trailing

Keep it as simple as possible. For trend trading you would use the current P3 levels in the superior trend as the initial protection and the following P3’s to trail your stop. For trading the movement do the same but in trend of the minor time frame. All stops work with a stop-order.

 

 

By |2017-08-30T15:35:59+00:00August 28th, 2017|Uncategorized|0 Comments

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