Trading Using Multiple Time Frames
Multiple time frame trading strategy development can be tricky… but often, necessary. Let’s just say for grins that you’re interested in purchasing something from Amazon, be it a watch, phone case, pair of shoes, or even a book. If additional pictures for the item were available to view (back of the book, bottom of the shoes, different angles of the watch, etc.) more often than not, you would view them. Yes? So why look at trading any differently?
“See the product from every angle before you buy it.”
Patterns exist on every time frame. For day traders, the 1, 3, or 5 min chart may be all that you feel is of use to you, but higher time frames may help you to see the bigger picture, or overall direction of price action. Patterns, momentum, volume, and readings on indicators all will vary by time frame. It’s important that you be aware of what you see and on which time frame you see it.
I prefer to watch the 5 for the most part, as I consider it most reliable for candle closes, pattern breaks, confirmed breakouts, etc. However, I venture to the 1 and 60 very frequently. I also visit the 15, 30, 120, 240, 300, d, w, and m charts on a fairly regular basis.
Why Develop a Multiple Time Frame Trading Strategy?
The reason to develop a multiple time frame trading strategy is simple: better entries/exits. You may be right in the middle of a falling wedge on the 120, but completely clueless to the big picture while you’re playing a downtrend on the 5. If you knew the break to the north side of the 120 wedge was coming, you could time a short exit or long entry to a “T.” If you stick with just the 5, you may be tempted to hold or even add on the pop thinking it will come right back down. Foolish to not look if you ask me.
First and foremost, understand that when you see patterns on higher time frames, they will take much longer to complete than they would if on the 1 or 5 min. You have to be patient. If the pattern you draw is on the 1 or 5, it will likely be a day trade, with the 15, 30, 60, and 2 hr being a swing trade, and a 3 hr+ being a longer term hold. This may sound obvious to many, but when you’re in the trade, having the patience for the pattern to complete on a higher time frame is easier said than done.Here’s an example using $SPY. First look at this rising wedge on the 60:
As you can see by the chart above, the trend lines I’ve drawn on the hourly line up well with the corresponding candle bodies. Once I convert the same chart data and trend lines to a 5 min chart, the candles don’t line up so well. That’s ok. They likely won’t. Your trend lines are lined up with the open and close of the HOURLY candles, not the 5 min. However, as price action nears your trend lines, you will know selling or buying pressure will be present at those levels, and can determine whether an exit or entry is appropriate.
See below example of $SPY 5 min using hourly trend lines.
By knowing that a valid rising wedge pattern is forming on the hourly (and that 67% of rising wedges break to the downside), you could potentially play the long all the way to the top, and flip it to a short as it nears the supply line (resistance) of the wedge.
This same principle can be applied in tons of ways. Patterns, Fibonacci tools, trend lines, pitchforks, virtually any tool that you can apply to a chart. It’s like you ordered the pair of shoes after viewing only one photo, only to find out the bottoms were bright magenta. Imagine an artist stepping back to look at the mural he’s painting, only to return to the closer vantage point to continue his work.
Essentially, the key to a multiple time frame trading strategy is finding the edge within other charts. By finding any pattern on a higher time frame, you can play the smaller moves within the pattern, all the while knowing the probability of the overall outcome of the pattern.