Explore trading multiple time frames to avoid chart head-fakes that might throw you off your strategy. Plus, identify trade entries and exits even as you ride out long-term trends.
Trading multiple time frames can be helpful for identifying short-term, intermediate-term, and long-term trends
Traders, are you looking only at the trees? It’s important to look at the forest, too. Trading multiple time frames can give your decisions the context they need. So unless you’re a day trader, don’t get mired in the ultra-short-term price movements of stocks.
Instead, consider looking at multiple time frame chart views to help you understand the primary trend. You’ll join the ranks of traders who follow the venerable Dow Theory—the seed of modern technical analysis—that was rolled out in a series of Wall Street Journal columns more than 100 years ago.
Charles H. Dow argued that price movement unfolds in three ways: the primary trend, secondary reactions, and minor trends. He likened these market price movements to major ocean tides, waves, and ripples.
Hang onto your raft. Primary trends can last several years or more. Secondary trends, or reactions, can last from several weeks to several months. Ripples, or short-term minor trends, can last from several days to several weeks.
You know it (or you should): an object stays in motion until it encounters a greater opposing force. Technical traders generally believe that this concept applies to market trends as well as falling apples. Some believe that a market trend in motion is more likely to continue than reverse. That means, in theory, trading in the direction of the primary trend should offer the path of least resistance.
Find your best fit.
How can investors apply this multiple time frame trading methodology to their trading? When looking at charts, consider using multiple time frames to decide when you confirm a trend and choose positions when the trends align. Most traders start with a top-down approach by looking at a monthly or weekly chart to determine the market tide or primary trend. A daily chart can be used to determine potential secondary market reactions, which are counter-trend corrections. Minor trends can be seen on hourly or even daily charts.
If you’re a long-term investor, don’t get stuck in a short-term view. Secondary or corrective trends can potentially eat you up. To look for primary trends, you could start by looking at a weekly chart. If you identify a major upward trend on that weekly chart, it'll be easier to spot a shorter-term trend on a daily or even shorter time frame chart. Starting with the longer-term chart first and then confirming that all trends align is more logical when it comes to considering trading decisions. Looking at a too-short time frame can sometimes bamboozle traders.
How can you incorporate looking at different time frames into your trading routine? One way is to apply technical analysis using multiple time frames. Does a trend-measuring tool indicate the same thing in multiple time frames? If you’re looking at a 30-minute chart such as the one in figure 1 it’s difficult to figure out if the mild uptrend is happening within a larger uptrend or downtrend.
FIGURE 1: TIGHT SHOT. This intraday time frame (5-day/30-minute) price chart for July 2 to July 10 shows a slightly rising price trend. Unless you're a day trader, don't get sucked into short-term price movements, which could be a secondary market reaction per Charles Dow. Long-term traders shouldn't be fooled (see expanded view in figure 2). Chart source: the thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Short-term trends are part of a larger trend, and it’s a good idea to trade in the direction of the primary trend. For this reason, it’s better to start with weekly or even monthly time frame charts to confirm the big-picture trend before moving to a shorter-term chart.
Switching to a longer time frame is easy on the thinkorswim® platform from TD Ameritrade. Select the Charts tab and enter a symbol. Then select the Time frame setup button immediately to the right of the Settings button at the top of your chart. You’ll see some prebuilt favorite time aggregations to choose from, but you can also create your own time frames by selecting Time frame and choosing the aggregation you want. You’ll see the selections are divided into time, tick, and range.
To bring up a weekly chart of the same stock as in figure 1:
Figure 2 shows the resulting three-year weekly chart.
FIGURE 2: TIME WILL TELL (USUALLY). This weekly chart shows a multi-month downtrend that began in December 2018. The short-term view shown in figure 1 reflects price activity in the last bar on the right. The primary trend remains down. Long-term traders don't want to get caught up in what Dow called short-term ripples or secondary reactions. Chart source: the thinkorswim platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
You can see from the longer-term chart that the short-term trend in figure 1 is part of a longer-term downtrend. The direction of the trends in the different time frames don’t align. This doesn’t necessarily mean you shouldn’t trade short-term secondary reactions. It really depends on what multiple time frame trading strategy you follow.
You may want to experiment with applying different time frames to find out which ones work well together. If you find one you like and want to add it to your Favorites, just select the star on the lower left corner of the Time frame tab. You can make changes to your Favorites list by selecting Customize list ... at the bottom. You can also make changes to your favorite time frames from the Chart settings icon.
Incorporating multiple time frame trading shouldn’t necessarily change your strategy; you’re simply using more information so your trading decisions aren’t made in the dark. Ask yourself, “What trends am I riding?” The more aware you are of trend direction, the better you will be at making your entry and exit decisions.
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