Markets Exist In Several Timeframes Simultaneously

Multiple timeframe analysis?! It sounds complicated and fancy, but it simply refers to the same chart with more than one time compression (e.g. daily or weekly). When both the weekly and the daily charts are in harmony, the chances of success can be greatly enhanced.

Markets exist in several timeframes simultaneously. They exist on a 1 minute chart, 5 minute chart, 15 minute chart, a hourly chart, a daily chart, a weekly chart, and any other chart. Traders often feel confused when they look at charts in different timeframes and they see the markets going in several directions at once.

The market may look for a buy on a daily chart and a sell on the weekly chart, and vice versa. The signals in different timeframes of the same market often contradict one another. Which of them will you follow? Most traders pick one timeframe and close their eyes to others — until a sudden move outside of “their” timeframe hits them.

Daily charts are great, but participants can get caught up in the move of the moment. Even though daily charts can contain random movements, they do have their strengths. Once an underlying trend is identified, daily charts can be useful to pick entry and exit points. On the other hand, weekly charts filter out the random movements and can help identify the stronger under currents that are driving the price.

The same idea applies if you are trading any security on a daily basis, in which case, the weekly bars will be the basis for the trend as well as the important support and resistance points. That is the foundation of multiple timeframe trading. Besides the effectiveness of using a method based on a multiple timeframe approach, another advantage is the method need not be complicated. A trader can make his or her method as simple or as complicated as desired. For me, the simpler the application, the better the results.

The proper way to analyze any market is to analyze it in at least two or three timeframes. If you analyze daily charts, you must first examine the weekly charts and so on.

Look at the daily chart of NSE Nifty below. What does it tell you. Most traders would say that it is just the beginning of a downtrend and would be happy to short the market all the way down. Well, most traders are not successful! To be successful in trading any market, one has to first examine the trend on a higher timeframe.

Now look at the chart below of the same security. This is a chart of one timeframe higher than the one above. What does it tell you? Simply, that the long term trend is bullish, and I should be looking to go long rather than short.

The patterns common to timeframes are easily compared with fractals; within each timeframe is another timeframe with very similar patterns, reacting in much the same way. You cannot have an hourly chart without a 15-minute chart, because the longer time period is composed of shorter periods; and, if the geometry holds, then characteristics that work in one timeframe, such as support and resistance, should work in shorter and longer timeframes. Within each timeframe there are unique levels of support and resistance; when they converge, the chance of success is increased.

One primary advantage of using multiple timeframes is that you can see a pattern develop sooner. A trend that appears on a weekly chart could have been seen first on the daily chart. The same logic follows for other chart formations. Similarly, the application of patterns, such as support and resistance, is the same within each timeframe. When a support line appears at about the same level in hourly, daily, and weekly charts, it gains importance.

Laws of multiple timeframes

• Every timeframe has its own structure.
• The higher timeframes overrule the lower timeframes.
• Prices in the lower timeframe structure tend to respect the energy points of the higher timeframe structure.
• The energy points of support/resistance created by the higher timeframe's vibration (prices) can be validated by the action of lower time periods.
• The trend created by the next time period enables us to define the tradable trend.
• What appears to be chaos in one time period can be order in another time period.

A comment on multiple timeframes

In thinking out timeframes it is necessary to understand that you cannot substitute a 10-period moving average of 1-hour bars with a 40-period moving average of 15-minute bars. Similarly, you cannot substitute a 10-week average with a 50-day average.

It seems natural to think that any two trends covering the same time span will give the result, but that is not the case. Although, we can average many data points, we cannot get rid of all the noise; fewer data points over the same time span will always yield a smoother result. Therefore, the use of hourly, daily, and weekly time periods multiple timeframes gives a much different picture of the market than simply using three different moving averages based on the same data.

It is much easier to see the major trend using weekly data, find the short term direction based on daily data, and time short entry using hourly bars.