Trading Using Multiple Timeframes
Futures markets around the globe are able to function properly because, at any given time,
some traders want to buy Futures contracts whilst other traders want to sell them.
A trader's desire to buy or sell is dependant on their strategy, their objective
and their chart time-frame. Short-term traders and long-term traders are going to see
dramatically different things on their charts because they are watching quite different
charts. Short-term traders are probably looking at 1-minute to 15-minute charts, whilst
long-term traders are probably looking at daily, weekly or monthly charts.
Trends, support and resistance lines, and technical indicators look much different on
a 1-minute chart to the way they look on a daily chart. For example you may look at
a 1-minute chart of Gold (ZG) and see that the price appears to be in a down-trend.
Yet if you switch your chart to a daily chart you may see that the price has been
in an up trend for years.
So which chart is right? Is Gold in an up trend or is it in a down trend? The answer
is that both charts are right. It all depends on your perspective and your trading
timeframe. If you are a shorter-term trader, you should be focusing on shorter-term
charts and trends. If you are a longer-term trader, you should be focusing on
longer-term charts and trends. However if you can get both the shorter-term trends
and the longer-term trends to line up, you stack the odds of success in your favour.
To get a comprehensive idea of what trending and support and resistance forces are
affecting the Futures contracts that you are watching, you should be analyzing the
following three charts (timeframes) in your technical analysis:
Once you have analyzed each timeframe, you can put them all together to
confirm a high-probability trading setup.
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Trend Chart |
The trend chart, as the name suggests, helps you to identify the predominant trend
with which you should be looking to trade. If the price in the trend chart is trending
upward, you should be looking to buy the Futures contract. If the price in the trend
chart is trending downward, you should be looking to sell the Futures contract.
To identify the timeframe you should be using for your trend chart, you first need to
identify the timeframe you ordinarily use on your trading (signal) charts. Once you
have identified the timeframe of your signal chart you should go up one timeframe to
find the timeframe that you should be using on your trend chart.
The following is a list of common signal-chart timeframes. Use it to identify the
appropriate timeframe for your trend chart:
| 1-minute signal chart |
15-minute to 30-minute trend chart |
| 5-minute signal chart |
1-hour trend chart |
| 15-minute to 30-minute signal chart |
4-hour trend chart |
| 1-hour signal chart |
1-day trend chart |
| 1-day signal chart |
1-week trend chart |
| 1-week signal chart |
1-month trend chart |
For example if you typically trade Futures contracts looking at a 1-hour chart, you should use a
1-day chart for your trend chart. If you typically trade Futures contracts looking at a 15-minute
chart, you should use a 4-hour chart for your trend chart.
Once you have identified the timeframe you should be using for your trend chart, you should
determine the prevailing trend on the chart using diagonal support and resistance levels
or moving averages.
You can see on the weekly chart for the Australian dollar (ADZ8) that the diagonal support
level indicates that this Futures contract is in an up trend (see Figure 1).
Figure 1 - Trend Chart
If there is an up-trend on your trend chart, you should be looking for buy signals
on your signal chart. If there is a down-trend on your trend chart, you should be
looking for sell signals on your signal chart.
Once you have identified the trend you need to identify profitable trading signals.
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Extra Material |
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One of the many benefits you will enjoy as you use multiple timeframes in
your investing is that you will see the Futures market from the perspectives
of many different types of traders. By looking at both short-term and long-term
charts you will be aware of what both short-term and long-term traders are watching.
This will help to prevent you from being caught off-guard by any sudden price movements.
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Signal Chart |
The signal chart is your most important chart. It provides the trading signals
that tell you when to look for buying and selling opportunities based on the
trading methodology you use. For instance if you typically use the commodity
channel index (CCI) to help you identify trading signals, you will use it here
on the signal chart. You don't have to use the indicator on the trend chart
or the timing chart (see Figure 2).
Figure 2 - Signal Chart
Using a signal chart in conjunction with a trend chart enables you to more accurately identify
potentially profitable trade signals. For example if your trend chart shows the price is in an
up trend, you should only be looking for 'buy' signals on your signal chart. The best way to
take advantage of a longer-term up-trend is to buy the Futures contract. If your trend chart
shows the price is in a down trendthen you should only be looking for 'sell' signals on your
signal chart. The best way to take advantage of a longer-term down trend is to sell the
Futures contract.
In effect the trend chart allows you to ignore the less-profitable half of the trading
signals you see on your signal chart. Since these trading signals are going against the
longer-term trend, they will most likely be unsuccessful.
Now that you have identified your trading signals you will then need to determine
exactly when to enter and exit your trades using your timing chart.
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Timing Chart |
The timing chart, as the name suggests, helps you to time exactly when you should
enter and exit a trade. Every tick counts when you are a Futures trader, so the
more accurately you can identify your entry and exit points the more money you
should keep in your account.
The following is a list of common signal-chart timeframes. Use it to identify
the most appropriate timeframe for your timing chart:
| 1-minute signal chart |
Tick timing chart |
| 5-minute signal chart |
1-minute timing chart |
| 15- to 30-minute signal chart |
5-minute timing chart |
| 1-hour signal chart |
15-minute timing chart |
| 1-day signal chart |
1-hour timing chart |
| 1-week signal chart |
1-day timing chart |
| 1-month signal chart |
1-week timing chart |
You can use one of the following two methods when pinpointing your entry and exit signals on your timing charts:
- You can identify the trend and support and resistance levels
- You can use the same technical indicator you use to generate your trading signals
Identify trend and support and resistance - if you see a buy signal on
your signal chart, you could expect to see the price on an uptrend on the timing chart.
You also expect to see that the Futures contract price is closer to support than it is
to resistance. This tells you that the Futures contract has room to move higher before
hitting resistance. Of course if it has just broken up through resistance, it should
continue to move higher.
Using a technical indicator - if you use a technical indicator such
as the commodity channel index (CCI) on your signal chart to generate buy and sell
signals, you can use that same indicator on your timing chart to help you identify
when to enter or exit your trade.
For example if you did indeed use the CCI on your signal chart, and it gave you a
buy signal, you would add the CCI to your timing chart and make sure that it was
giving you a buy signal on the timing chart as well. If the CCI is not giving a
buy signal on the timing chart, you should wait until it gives a buy signal on
the timing chart before you enter the trade (see Figure 3).
Figure 3 - Timing Chart
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Learning Reinforcement Exercise |
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Which of the following chart time-frames could serve as a timing
chart in a multiple-time-frame setup? (Mark all that apply)
- 1-minute chart
- 1-week chart
- 15-minute chart
- Tick chart
| Correct Answer |
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Any one of the four choices could serve as a timing chart. It all depends on the
time-frames you select for your trend and signal charts.
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High-Probability Trade Setup |
Let's take a look at what a high-probability trade setup looks like using the multiple
timeframe trading approach. We will be looking at an example of Crude Oil (CLZ8) using
a weekly chart as the trend chart, a daily chart as the signal chart, and a
1-hour chart as the timing chart.
First you should look at your trend chart to see in which direction the currency
is trending. As you can see on the Crude Oil weekly chart, the price has been
on an up-trend for some time now (see Figure 4). It would be foolish to fight
this trend and try to sell the Futures contract.
Figure 4 - Trend Chart (High-Probability Trade Setup)
Next you should look at the signal chart to identify an appropriate buy signal for Crude Oil.
In this example we are looking at using the commodity channel index (CCI) to generate
the trading signal. You can see on the daily Crude Oil chart that the CCI gave a buy
signal on 4 May as it crossed from below -100 to above -100. The Futures contract price
was also on an up-trend at that same time (see Figure 5).
Figure 5 - Signal Chart (High-Probability Trade Setup)
Lastly you should look at the timing chart to identify an appropriate time to buy Crude Oil.
You can see on the 1-hour chart that the price is trending higher and finding support
along an up-trending support level (see Figure 6).
Figure 6 - Timing Chart (High-Probability Trade Setup)
When you can seeing that the trading signal generated on the signal chart corresponds with both the trend on the trend chart and the price movement on the timing chart you should be confident that your trade would probably make money.
Using multiple timeframes provides you with more accurate trading information. Better information leads to better trades. Better trades lead to more profits and a wealthier – perhaps happier – you.
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