Let’s start with the basics. Why should you trade across multiple timeframes?
- Firstly, taking a big picture view of both charts and fundamentals can guide you to where the best risk/reward opportunities lie.
- Secondly, you can make sure you are trading in alignment with the long-term trend.
- Thirdly, you can manage your trade more effectively and avoid giving back too much profit.
- Fourthly, you can improve the risk/reward ratio on your trade ideas.
But trading across multiple timeframes has its pitfalls.
It’s easy to get confused about what you are trying to achieve, or to cut yourself out of a profitable trade by getting too finicky.
The trick here is to get organised, be very clear about your objectives, and write clear rules for any actions you need to take.
What trend are you trying to catch?
To determine what chart timeframes you should be looking at, think about your objective.
If you are trying to catch long-term trends like this:
It’s no good looking on a 15 minute chart!
Get very clear on the moves you are looking to catch, and pick timeframes that are relevant.
In this example, daily charts make more sense:
(Or even 4 hour charts if you want to be very precise.)
There is no magic formula to this. Simply think about what makes sense in terms of what you are trying to achieve. If you find you are getting stopped out too much on the lower time-frame, then you are probably trying too hard. Relax – and step back to a higher timeframe.
Determine the direction from the higher timeframe
One of the reasons for using a higher time-frame is to avoid bottom picking. Picking tops and bottoms can be done, but it is a specialist skill, and not one that most retail traders can do well.
So think about the type(s) of trend(s) you want to catch, and then wait until they have begun before you try to trade them. You should have a very systematic way of identifying if and when a trend has begun.
For example, you might wait until you confirm the market type is bullish on the hourly chart:
Before using a moving average crossover buy signal to enter on the 15 minute chart.
Remember: one of the keys to successful trading is applying the right strategy to the right market type.
What timeframe do you place your stop on?
One potentially confusing topic when operating off multiple timeframes is which timeframe you should use to determine where to place your stop.
Again, there is no hard and fast answer. Conventional wisdom would suggest you place it on the lower timeframe to improve the risk/reward ratio.
Conventional wisdom is not always correct, and there is certainly a case to use the higher timeframe for stop-loss placement. I believe in “hard to hit stop-losses” which are far away from the current price. I also believe in using trade management rules to get out before that stop-loss is ever hit.
If you place your stop-loss on the lower-time frame, it may improve the risk/reward ratio, but it may also degrade the quality of your system by adding in more losing trades, and cutting short some winners.
Same goes for exits
Exits is another area that befuddles the multi timeframe trader.
Again – when you are thinking about your exit, consider your objectives.
You want to make sure that the timeframe you use for your profit targets and trailing stop is in alignment with your goals for the trade.
As I mentioned earlier, it is no good trying to catch a trend on the weekly chart by trailing your stop on the 15-minute chart.
Do you need multiple timeframes in your system?
Not all good trading systems require multiple timeframe analysis. It is possible to use other tools to determine the longer-term trend that might be simpler for you to apply.
Perhaps you use a long-term moving average to get your direction:
Or another good tool is the Ichimoku cloud:
Using only one timeframe can help to simplify your system, and it makes for much easier back-testing.
The simplest option is often the best one, as it avoids confusion and allows us to focus easily and intently on our goals. Unless you have identified an edge in using multiple timeframes, consider sticking to one for the moment.
Set up a review process
If you do decide multiple timeframes are right for you, then consider establishing a review process.
For example, you might:
- Review your monthly charts at the start of every month, and note down any opportunities you see
- Review your weekly charts at the start of the week, and determine the market type
- Check your daily charts each day for trading opportunities
- If you have time, you might stalk an entry on a set-up on the 4 hour chart
Or, for day traders:
- At the start of the week, review daily and 4 hour charts. Mark any support and resistance levels on your chart. These might serve as profit targets or decision points when you trade
- At the beginning of each session, look 3-4 timeframes higher than your trading timeframe to determine the trend and market type
- Trade and manage your trade off the one timeframe.
You just need to think about this in a logical manner. Develop a process that works for you, and helps you to stay organised and aware of your system’s crucial factors. It’s worth remembering that a simple, organised and well-defined system will outperform a complex system in disarray nine times out of ten.
Now it’s your turn to get out your trading plan:
- Get very clear on what type of move you are trying to catch
- Logically assess the charts to determine what time-frames are going to be help you catch that move
- Make a decision as to whether using multiple timeframes gives you an edge
Once you have completed these steps, you can work on your stops, exits and trend definition rules.