If you want to improve your trading, you should use more than one time frame to set up your trades. Using of multiple time frames improves your view on trade you are prepared to take. Multiple time frames can give you clearer picture of where the trend is. Maybe you are looking on 5 minute time frame and saying: This is trending higher. But then you have a look in 60 minute chart and it’s screaming for short. Anyway it gonna be better probability of a good trade if you look at bigger time frames.
Long Term and Short Term
Traders are usually divided between Long Term and Short Term prospectives. Long Term trader may focus on daily, weekly and monthly charts, while a Short Term trader may look at 1 minute to 5 minute charts. Each time frame has a different perspective on the market and there is trades in every level, so why not use them all to benefit your trading? Sometimes traders may spend too much time looking at 1 Minute and 5 Minute charts, but moves here can be quite unpredictable. By adding 60 Minute chart, trader may be able to catch stronger, more stable moves and see thing what are not apparent on 5 minute chart. Even better to look at daily, weekly charts. The higher time frame, the stronger the setup is. A trend on a 5 minute chart does not hold as much weight as one on a daily chart does.
In my trading I have found that adding 60 minute chart to my trading decisions, largely improves my trading. Most of the time Now Im using 5, 60, Daily, Weekly, Monthly charts. Daily, 60 Minute goes for set up and 5 minute for execution. By looking at higher time frame you can see better what direction is it heading, where the support and resistance levels are. By knowing the major trend, you should have a better idea in what direction to take trades in. If the trend on daily or weekly charts is up, thats the most probable direction to take trades on.
Seeing the big picture
Sometimes if you are looking only on 5 minute time frame, things may look completely different than if you are adding larger time frame. For example in this 5 Minute SPY chart it looks like it’s trending higher and isn’t stopping. If you add a higher time frame things might get different perspective.
If you have been watching SPY recently, you saw how difficult it is to get through 314, 315 area. Lets add a Daily chart and see where it’s actually going.
Now lets see how it traded trough the day. This is continuation of 2nd of July, continuation to previous 5 minute chart.
Now we can see how stock reacted to these resistance levels. If you only had a look on 5 minute chart there is no way you would know about these resistance levels. Now lets see how it traded that next day.
As you can see, it couldnt get through 315.64 level and there was a sell off. Most likely it can trade lower until it hits some strong support level or trend. Or it can break through these resistance levels and trade higher. Remember that best probability is to trade at trend direction. If it trades lower, there is good possibility it gonna hold this 300 level of support and again trade back up to 314-315 area.
As by looking in 60 minute chart, we can see short term trend is still safe until it dont break 312, 311.5 area.
Now you see that by looking on multiple time frames can drastically improve your trading decisions.
Timing the trade
Looking now at SPY hourly chart seems like the best risk reward trades would be trading off a trend line. Every time it hits it its a good possibility to go long. With very low risk you can get high reward trades. Next thing I would do, go on 5 min chart to get entries. If I am looking to hold trades for longer, I use 60 Minute time frame to get a bigger picture. And if I am thinking to hold trade for couple days, definitely will have a look on Daily and Weekly charts.
Holding the winners longer and Stop Overtrading
Higher time frames can help you to hold winners for longer, as you wont get so many signals. If you watching 1 minute chart, seems like on every pullback you want to exit the trade. But by looking at bigger time frame it’s like a drop in an ocean, and you still got no exit signal.
Same goes for overtrading. By watching 1-5 Minute charts, you are getting so many signals. And at the end you are overtrading. Unnecessary trades, selling too early, before target, cause in smaller time frame it looked like its falling apart.
Use the same indicator system to confirm trades
Trader can use the same system to trade in multiple time frames. At first get the signal on bigger time frame and then trade the same signal on smaller time frame. For example lets have a look on 9EMA – 20 EMA crossover system. Once you get a buy signal in bigger time frame, use it to trade the same direction on smaller time frame. Like in this case, LONG is entry and SHORT is exit. On the same note you can have a look how many signals give longer time frame and how many short term…
At this situation trader could long on every long signal on 5 min chart after there has been signal on 60 Minute chart. Trader can go long until there is 9-20 crossover to the downside, what says SHORT. Even better if you can automate this system and use it only in trading hours, so you don’t get hurt by overnight gaps, it could give quite nice returns. Seems like I found something to work on…