Using multiple time frames in trading is a topic very near to my heart as is
trend analysis. There is a lot of junk information our charts give us purposely. If all the information on the chart was useful, everyone would be using the same strategy and everyone would be profitable. Using multiple time frames in conjunction with trend analysis really lets you know what you need to be focusing on and just ignore everything else. This is what separates professional analysis from novice, knowing what to filter out, when and why. It also leads to more conviction when you are taking a trade.
The Components of a Trend is really an important read before you read this one. I put it out first for a reason. As far as technical analysis goes, analyzing trends using multiple time frames is the foundation of what I do and what many successful traders have been doing.
Intro:
For my holding period being around 1-4 weeks, the daily and hourly charts are the most important time frames that I use and that is going to be the focus of this post. The principle remains the same though even if you are a longer term holder and prefer to hold on for months at a time or a day trader looking to be flat at the close. In the case of being longer term, maybe you would rather be looking at daily and weekly as your primary time frames. Just because those are your primary time frames doesn't mean you should discount the others. I believe the point of using multiple time frames is to better understand the market structure you are trading in.
Here is an exercise of AAPL looking through multiple time frames for swing trading. Click on each link then when they are all open, flip through the tabs from weekly all the way down to the 15 minute:
Weekly,
Daily,
65 minute,
30 minute, &
15 minute. Like I said since the daily and hourly charts are my primary tools for my holding period I put the most weight on them. What I gather from this analysis is that AAPL is in a downtrend on the daily, and has just recently gotten back in line with the daily trend on the hourly when it put in that lower low as well as the 10 day average starting to turn lower. At this point trend analysis takes care of the rest, following the lower highs and lows along with some key moving averages.
Being In Line:
The most important part about using multiple time frames is that you stay with the trend of the highest time frame out of your primary time frames - for me it would be the daily chart. That is the the big deal of using multiple time frames in my opinion. Any micro analysis or classic trend trading you are doing on the lower time frames should be in line with the higher one. For example if we are talking about my primary time frames; daily & hourly, then I need the daily chart to be in a downtrend as defined by my post in order to be trading the hourly chart to the short side. A key part of trading is knowing when not to trade. If the daily is in an uptrend, but the hourly is trending lower, that should be avoided (unless you are doing micro analysis trading and even then only long setups should be considered). If you are having trouble deciphering what is considered a trend or not, take a look at using the
trend analysis from the previous educational post. Sometimes you are going to have to wait for a setup to come to you and that is perfectly fine. There are hundreds of liquid stocks out there, don't get caught up on one.
Classic Conservative Trend Trading:
This is just trend trading without any advanced concepts. By that I mean the lowest time frame you follow is already trending in the same direction as the highest time frame. For my primary time frames that would mean both the hourly and the daily charts are trending higher and I am trading to the long side. This would be the highest probability and most conservative way to trade since there are no assumptions being made as there are when using micro analysis. You are simply following what the market is doing on your lowest (primary) time frame.
Micro Analysis:
Simply put, micro analysis is when you are expecting that your higher time frame is going to over power the lower time frame which would force the lower time frame to get back in line with the higher one. As an example, lets look at this Pandora stock. Here is the daily chart (
click here) coming into the 50 day moving average while it is rising. It's still in an uptrend and still well above the prior low. Here is the hourly chart (
click here). For this to be classic trend trading, I would have to wait for the hourly chart to start making higher highs and lows as well as get back above its 50 period average (which represents to the 10 day average). Using micro analysis, I am making the assumption that the daily chart is stronger than the hourly chart is weak. I am expecting that the strength of the daily chart is going to force the hourly to get back in line and continue the uptrend. Notice that this is still within the guidelines of the most important rule of being in line with the highest (primary) time frame that I follow. You really want to see signs of buyers (or sellers depending on the trend) emerging on the lower time frame though rather than just blindly buying a higher time frame. At least enough to where you can define your risk confidently.
Bringing it together with examples:
Here is a nice example of some classic trend trading.
Click here to see the corresponding hourly chart to go with it. The daily time frame was in a nice uptrend and started to get a break on nice volume and the hourly chart was also breaking out with a rising 50 period average (10 day average).
Here is an example of what would be considered a micro analysis entry.
Click here to see the corresponding hourly chart. Here the assumption would be that the gap is going to hold and the 50 day average on the daily is going to hold up the stock action to see higher prices and the hourly chart will fall in line. I would personally like to see more confirmation but this is an example none-the-less.
This is an example of where the micro analysis entry did get some good follow through.
Click here to see the corresponding hourly chart. You can see on the hourly that the price action near the $68.5 level was below a declining 50 period average (10 day) and would not be considered classic trend trading, but it was a good micro analysis entry.
Here in KORS is a setup of a classic trend trading entry.
Click here to see the corresponding hourly chart. If KORS were to break out from here to the upside, both the hourly and the daily charts would be in strong up trends and therefore there are no assumptions being made. You are simply following the trend on the lowest (primary) time frame you follow.
Conclusion:
Hopefully you have a better understanding of the importance of using multiple time frames to analyze trends and price action. I hope you can (if you have already) find out what your primary time frames are going to be and what process is right for you. It is only one part of trading but it is a very important part of the technical analysis world. If you study all different styles of the real traders, you will find that they fall into this category somewhere. Whether it is that the lowest time frame they follow is a daily chart and all they do is classical trend trading, or if they use micro analysis with a daily and 5 minute chart, most real traders fall somewhere in this spectrum of using multiple time frames. Find out what works for you, but most importantly you need to know what you should be focusing on. Just like the previous educational post on trends, this is very straightforward stuff. The problem traders run into is this this isn't exciting enough for them, they need something that feeds their adrenaline like the latest indicator they found over the weekend and can't wait to test it out Monday morning. We all have been there but understand that if you are going to make it as a technical analyst that trades real money, you will eventually find these skills to be superior. Hope this helps some of you out there.
Trade well,
-Michael
