When we trade it is all too easy to get caught up in the moment. This is especially true for higher speed intra-day traders. The problem is that when we trade like this, it is like running full speed with your head looking straight down. Sure, you can see the immediate obstacles and dangers, but you cannot be prepared for that large wall that lies directly in your path. If we trade “in the moment,” we will financially run head first into that wall and we know that is no fun.
Trading properly involves eliminating surprises and being prepared for what may come while you have your capital exposed. To do this, we must gain proper perspective to price action and anticipate upcoming events or price barriers that will change the direction. When I first learned how to trade, I was taught to use multiple timeframe analysis. Throughout my trading career I have used many different tools, but this is one technique that I have never deviated from.
Multiple time frame analysis requires a trader to view prices and trend from three separate time frames. Having this perspective allows a trader to better identify opportunities and dangers in their trading. To begin using the analysis a trader should first select their trading time frame. This will be where you plan the critical parts of the trade including entry, target and stop prices. You want to use the largest time frame that you feel comfortable trading on. This allows for larger profits with acceptable risk.
Once I have selected the trading time frame, I need to select another to gain proper perspective. In the Core Strategy Course at Online Trading Academy, we discuss the different modes that the markets operate in. If you are in an impulsive mode of the trend, it will typically end at the supply or demand of the next larger trend. If you are utilizing multiple time frame analysis, then you already have those levels identified.
Chart time frames are related by a factor of five. Therefore, in choosing your intermediate time frame, multiply your trading time frame by five to select the chart period. For example, if trading on a 10 minute chart, use a 50 or 60 minute chart for perspective. If you trade on a daily chart, then a weekly is your natural perspective chart.
The same tactic is used to choose the higher time frame chart. You would multiply the intermediate timeframe chart by four, five, or six to arrive at the time period to set your charts for a proper perspective on price.
For certain entries or to reduce risk, traders may also utilize a smaller time frame to refine their zones. Keeping with the trend relationships here, they should use a period on that chart that is 1/5th that of the trading time frame. You must be careful as a trader that you only rely on this chart for timing entries since the more volatile nature of shorter time frames will tend to scare traders out of great trades from only a small pullback in price. Once you are in the trade, do not look at this shorter time frame again!
The short time frame is extremely helpful to get confirmation on entering your trades at supply and demand. As we approach our identified entry price the smaller charts will usually show the reversal pressure first. They may even show a pattern on the chart or candles themselves well before you would see it on your trading time frame. This gives you the early jump on most other traders. Additionally, if you are wrong in your trade, entering earlier will mean that you are closer to your stop price and will lose less on bad trades.