Trading Multiple Time Frames

There are many ways one can make big profits trading the markets. Usually the approach taken is one that fits the trader's comfort zone for risk and activity. But no matter what approach a trader finally decides to focus on, examining the market across several time frames can only help in the final tally.

We have all heard the saying that "the trend is your friend, trade with the trend." I personally believe this maxim. While the underlying intent is to imply trading 'with' the trend only in order for it to be 'your friend', it really comes down to your ability to 'time' the start and end of these trends, and to do so for the time frame you wish to trade in.

For example, if you are able to time the very bottom and top of each new wave within a trend with perfect precision, the trend itself would have no meaning to you. You would simply buy the bottoms and sell the tops without any other concerns whatsoever.

The reality of trade analysis is that there is no 'perfect' timing model. The best you can hope for is a timing approach that is 'above average', short of perfection. Due to the gap that exists between 'above average' and 'perfection', it would benefit the trader to look for ways to further improve the law of averages and add greater probability for a successful trade.

Increasing probability requires discipline on the part of the trader. To wait for ripe opportunities can make some traders restless, which is why so many have more losing trades than necessary for the trading methods they have chosen. The point is not be to actively trading, but to be actively making profits.

With the proper discipline, the trader should consider looking at the market from several different perspectives. For example, if you like to base your trades on signals found on a daily price chart, consider what direction the monthly and weekly prices are currently moving in. If the monthly and weekly chart are in harmony, both making higher swing bottoms and tops, then the underlying major cycle of the market is clearly bullish and would favor your daily buys over sells.

When dealing with even lower time frames, such as day trading the minute charts (i.e. 5 min, 10 min, etc.), it isn't necessary to examine time frames of monthly or weekly, as these are far removed from the time frame you are trading in. A nice rule of thumb is to make your highest time frame for consideration no more than say 20 times the time frame you wish to trade.

So for those who trade off daily charts, the highest time frame of consideration would be the monthly charts on down to daily. If you trade based off the 5 minute charts, you could start by looking at the 2 hour (120 minutes) chart down to 5 minutes.

When looking at the higher time frames, note their individual trends. When they agree and you take trades filtered by this information, you increase your probability for winning trades. It is likely that you will miss many trade signals that you would otherwise have taken, but the payoff is usually well worth the sacrifice for action.

There is an exception to this line of thinking. Trading based using higher time frame trends to filter trade signals is usually only effective if your trading style is to let your profits run and to cut your losses short, another well-known saying in trading circles. However, if your trading method or system is based on exiting trades based on a fixed profit target, however calculated, then taking advantage of higher time frame trends may simply be a hindrance to performance of such a system.

If you are one that wants to enter trades where the strength of the market carries you into profit for durations greater than just a couple of days, you will find matching longer time-frame waves with the one you wish to catch will give you the best opportunity to do so.