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TickLearner has sent in the following comment:
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Pleasure to read a bit from you after a long time. But as a trader, at times, I get confused, shall we follow the trend of the trading chart or a time frame above the trading chart.
Whats your advice on this.
UnQuote
This is an interesting question, which I will try to answer by explaining how I look at multiple time frames.
The Theory:
There is a chart which we use for our trading. For swing traders, this could be a 60 minute chart, an End of Day chart, while for day traders their chart could be for 5 minutes or 15 minutes. This is called the trading time frame chart.
Now, common sense tells us that bull markets are driven by long term investors. We can be sure that long term investors use weekly or monthly charts for their decisions. The five minute or even the 60 minute chart is of no use to them.
Suppose, I am a trader who uses 60 minute charts to decide on swing trades. If the weekly chart is in a sustained up move, then my bullish trades are likely to be more rewarding than my bearish trades. In other words, the higher time frame – that of monthly or weekly charts controls my trading time frame.
Thus, even when I am trading on 60 minute charts, I should be aware of higher time frames which control my swing trades.
To sum up, my trading time frame is used to decide on my entries and exits while a higher time frame is used to decide on the direction of my trading. This is the theory.
The Theory put to Practice
Then, if I am trading on 60 minute charts, I also refer to end of day charts which are the higher time frame for me. I determine the trend on end of day charts. Then I trade in my time frame (60 min) only when the trade is in the same direction as the end of day chart.
For example, if the EOD chart trend is UP, then I take only buy signals in my 60 miute chart.
The Problems
Like most technical analysis ideas, the theory is much easier to understand than the actual implementation.
Suppose the market is bottoming out. The daily trend remains down, but there are many buy signals on the 60 minute. I have to leave ALL the buy signals until the end of day chart does not turn up.
We could have a more complicated setup: Weekly is turning down, Daily is turning UP, 60 minute is turning down. Now, what IS the higher time frame saying?
My Answers:
I like to keep trading simple. I stay with the trading time frame. That is it!
Sometimes I see a pattern on a higher time frame which I wish to trade. Then, I switch the time frame. The higher time frame actually becomes my trading time frame for that particular trade.
Finally, there is no hard and fast rule in trading. What works for you is good enough.
Questions and comments are welcome.
[Please: no abusive comments. If you do not like my blog or my words, you do not have to read or listen.]