Lessons from the Pros


Multiple Time Frames and Why I Swing Trade – Continued

Hello traders!  After my last newsletter, Why I Swing Trade, I was swamped with emails asking about all the time frames that I use in trading. I’ll get to my specific time frames a bit later in this letter, but first I would like to explore the concept of multiple time frame analysis and why we use it.

As you may have realized by now, our core strategy of buying in institutional demand and selling in institutional supply is much different from conventional technical analysis. The reason for this is that most new traders read the same books, and trade the same predictable way day after day. The common statistic of failed/unsuccessful traders is 90%. Yes, ninety percent. Some studies even put that number higher! If conventional technical analysis was so successful, more new traders would be making money in the markets. Our main purpose at Online Trading Academy is to show people how and where the institutions are trading. Do you really think a major multinational corporation or central bank is watching a one minute chart trying to day trade this market for 5 pips? Doubtful.

So our multiple time frame analysis breaks down like this. Generally, we recommend using three time frames to plan your trades. Our largest time frame determines our trend, which we use to decide whether we should go long or should we go short. I like to also use the larger time frame to help with the supply and demand levels that the institutions are forming with their massive orders.

The middle time frame is where I will mark my levels for entering trades-our zones. Using this medium time frame allows me to “shrink” my zones a bit-a daily zone might be 100 pips wide, while a fine-tuned four hour zone might be only 30-40 pips wide. Why do we care about the width of our zones? Because the zones indicate how large our stop loss must be. Larger zones have larger stops, smaller zones have smaller stops.

When a trader chooses to use a third, smaller time frame, usually this is where he or she will “time” their entry. In class, this is where we go into candlestick patterns for entry. It wouldn’t be fair to our students to reveal everything in this newsletter, so I hope to see you in class!

So the breakdown on time frames is 1. Long term for trend-long or short; 2. Medium time frame for where to enter trades in our zones; 3. Smallest time frame for exactly when to enter. Which leads us to choosing the exact time frames to use. A very easy way to decide is to use a multiplier/divisor of 4,5, or 6. Starting with a monthly chart as your longest time frame, then a four hour, then a 1 minute makes little sense as the time frames are too far apart. Using a 30 minute, 20 minute, and then a 15 minute chart makes no sense as the information is too similar. Instead, using our 4,5,6 rule of thumb, the breakdown could go like this: daily for long term, then divide the daily by 4,5, or 6 to find the next time frame down. A four hour chart divides into a daily chart 6 times, fitting our rule. The next time frame down could then logically be a one hour chart . These time frames would suit a swing trader very well. If you wanted to trade less often and go for larger trades, perhaps a weekly, daily and four hour chart would suit you. A shorter term trader could use a four, one hour, and ten minute chart which would still fit our rule.

On the following pair of charts, a daily and a four hour, I’ve marked the uptrend and then the downtrend on the USDJPY currency pair. Up until early January, the easier money was to be made on the long side of the trade as clearly the trend is up.  On about January 13, a new downtrend has been established and the easier money would come on the short side. When I say easier money, what I really mean is that your profit targets will be larger, and your time spent managing trades will be less. Traders who choose to counter-trend trade spend more time managing their trades, and are going for smaller profit target. I’ve always been a fan of less effort and more money. I know, I’m weird.

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For clarity’s sake, I’ve only marked the two most recent clean supply levels – the nearest was hit three times over a few days in February. Trading from these time frames usually give us plenty of opportunity to enter at our zones. In my experience, using much smaller time frames mean I have to be near my computer much of the day to take advantage of these quick trades. Personally I would rather do other things than hang around my computer waiting for a zone to hit! With the four hour chart as my medium time frame, I have plenty of time to enter trades, sometimes as much as a full day-instead of a couple of minutes.

So there you have it. Hopefully I’ve answered your questions about why we use different time frames, and why I’ve chosen to use the time frames I trade.  For further clarification, hope to see you in our next class!

Until next time,
Rick Wright

DISCLAIMER This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.