Trading Using Multiple Timeframes

If you have ever looked at chart on different timeframes, you probably noticed that markets can move in different directions at the same time. A moving average may rise on a weekly chart, giving a buy signal, but fall on a daily chart, giving a sell signal. It may rally on an hourly chart, telling us to go long, but sink on a 10 minute chart, telling us to short. What the hell is going on?

Let’s play a quick game called “Long or Short”. The rules of the game are easy. You look at a chart and you decide whether to go long or short. Easy. Okay ready?

5 minute chart

Let’s a take a look at a EUR/USD 5-minute chart on 11/03/05 around 4 am EST. Oooh it’s so nice. It’s trading above its 100-day simple moving average which is bullish and look! It just broke out and closed above it’s previous resistance! Perfect time to go long right? I’ll take that as a yes.
Oh! You are WRONG! Look what happens next! It’s goes up a little bit but then drops like rock. Oh too bad.
60 minute chart

Let’s look at the same exact chart on a higher timeframe. It’s the same date, 11/03/05 and the same time, around 4 am EST.

Holy cow! The pair broke out of its down channel which is bullish. It’s trading above its 100-day simple moving average which is bullish. The last candle broke and closed above its previous resistance which is bullish. Looks like a bull, smells like a bull. Nothing but up from here right? You say long.
OH! Zero for two! How do you like your steak cooked? Because from the looks of this chart… the bull got slaughtered. The pair even dropped back into its old down channel. Look at that last candle, it was dropping so much, it couldn’t even stay inside my chart! Amazing!

4 hour chart

Okay, we’ve now moved up to an even higher timeframe chart. A 4-hour chart. It’s still the same date and time, just a higher timeframe. If you had looked at this chart first, would you still have been quick to go long on either the 5-minute or 1-hour chart?

It’s currently trading in a down channel which is bearish. The pair is hitting the upper trend line of the down channel which is extremely bearish. Yes, it’s still trading above the 100-day simple moving average which would count as bullish, but that channel would still make me cautious. Especially since it’s trading around the upper trend line.

Look what happens! Droppin’ like its hot! The pair stayed true to its channel. It hit the upper trend line and traveled down.

Daily chart

For fun’s sake, let’s go up one more timeframe to the daily chart.

Wow, will you look at that? The pair is trading in an obvious down trend. It’s below its 100-day simple moving average and its in a down channel. On this chart, the trend direction is so obvious! Do you also notice the last candle? It tested the upper trend line and reversed. Not a very good bullish sign. Let’s look at what happens next.

Hallelujah! The downtrend continues!

So what's the point?

All of the charts were showing the same date and time. They were just different timeframes. Do you see now the importance of looking at multiple timeframes?

I used to just trade off 15-minute charts and that was it. I could never understand why when everything looked good the market would suddenly stall or reverse.

It never crossed my mind to take a look at a larger timeframe to see what was happening. When the market did stall or reverse on my 15-minute chart, it was often because it had hit support or resistance on a larger timeframe.

It took me a couple hundred bucks to learn that the larger the timeframe, the more important support and resistance levels were. Trading using multiple timeframes has probably made me more money than any other one thing alone. It will allow you to stay in a trade longer because you’re able to identify where you are relative to the big picture.

Summary:

• You have to decide what the correct timeframe is for you.
• Once you've found your preferred timeframe, go up to the next higher timeframe. There you make a strategic decision to go long or short based on the direction of the trend. You would then return to your preferred timeframe to make tactical decisions about where to enter and exit (place stop and profit target).
• Choose a set of timeframes that you are going to watch, and only concentrate on those timeframes.
• Pick three timeframes: 1hr, 4hr, daily — 5 min, 15min, 1hr, and so on. And only use those timeframes. Learn how the market works during those timeframes.
• Use a long-term chart to find the trend, and then return closer to the market to make decisions about entries and exits.
• Using multiple timeframes resolves contradictions between indicators and timeframes. Always begin your market analysis by stepping back from the markets and looking at the big picture.
• Don't look at too many timeframes, you’ll be overloaded with too much information and your brain will explode.
• Make it a habit to look at multiple timeframes when trading.

Wise words:

"A good signal jumps at you from the chart and grabs you by the face — you can't miss it! It pays to wait for such signals instead of forcing trades when the market offers you none. Amateurs look for challenges; professionals look for easy trades. Losers get high from the action; the pros look for the best odds."

- Dr. Alexander Elder -