Multi time frame trading
Like many others I always try to increase the probability of each and every trade becoming profitable. One such way is to use multiple time frames when you are considering entering into a position. Next I will share with you they way I use this method for intraday trading, although I will usually stay in the market for no more then 6-12 hours I am still using charts from a completely different scale to support my decision.
For my trading I am using 3 different time frame before making any decision.
1.Daily chart over 24 months
2.Hourly chart over 3 months
3.15 minutes chart over 7 days
The daily chart will be used in order to understand the underline trend of the market overall. I will use the USD/CHF pair as an example. According to my analysis we are currently in a downturn towards the lower boundary in a bullish run. This implies two potential and opposite trades.
1. Long – assuming that I am correct about the trend there is a high probability that price will rebound once it touches the lower bound of the trading channel.
2.Short – The argument is the same but, why wait ? We can go short now and exit when the price hits the lower bound.
The hourly chart tells a different story. From the beginning of January 2010 to the 19th of February the market was in a bullish trend , a 45 degree positive incline. From February you can see the trend has run out of steam. The rising bottoms are gone replaced by falling tops are everywhere, this suggest that the bullish run is over and we are now in the midst of a bear move. See the chart below:
This is enough information for me to make a decision which way 2 go. I will take the downside, short on the US Dollar, My target would be the bottom of the channel on the daily trend and my stop loss will be placed around what I see as the closest resistance point (1.0737).
In order to fully optimize the potential of the trade I will drill down to the 15 minutes chart. This chart will not affect in anyway the decision if to go long or short, it will only determine where the optimal entry point is.
For this I will be referring to the Elliot wave principle. Assuming the main movement is down one can assume we are now in wave 4 of the movement; all we need now is a beginning of a downturn indicating for wave #5 to commence in order to get into the position. See chart below.
To summarize, we use the daily chart to understand overall market direction and the type of the trend (direction, uniformity, stage). The hourly chart will be used to determine the direction of the trade and the 15 min chart to locate the optimal entry point.
I will be reviewing this trading idea in 5-10 days and see if the market behaviour was similar in anyway to my expectations.
Good luck and happy trading.
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