Multiple time frame analysis trading strategy is a great way to provide a much more in-depth analysis of the market trend direction for your trading framework. But many traders still don’t know how to utilize this tool to maximize its advantages.
This video will tackle the best tips on how to use multiple time frames that work in today’s market which may help you tremendously in your trading career.
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Multiple Time Frame Analysis
Today we’re going to talk about multiple time frame analysis. As you see here I am using multiple time frames on forex, but this works for stocks, commodities, futures, and options too. Using multiple time frames is very common and I do recommend it. In fact, I do employ it myself. However, one of the biggest mistakes that I see most traders doing is using a ratio of the time frames that are way too far apart. For example, we’ve got a 60-minute chart on the left and a daily chart on the right and that is a 1 to 24-hour ratio. In effect, we’re going to have 24 bars on the 60-minute chart for every bar on the daily. I do not recommend you do that because that will be very lagging.
Now, if you’re trading stocks for example, then it doesn’t trade necessarily 24 hours. During open outcry they trade six and a half hours – you’d have a one to six point five ratios between the two charts. Still to me, not tightly correlated enough. The timing is not synchronized tightly enough. What people normally do is they’ll look for confirmation; they like to trade in the direction of the trend of the longer term time frame. Well, you’re going to have a late signal, a late confirmation. So I like to tighten those up. Let’s just look at a couple of examples here so you can see exactly what I’m talking about. Now, I’ve got a 14-period ADX here, no magic to this 14-period ADX, but people usually like to confirm with trend than the higher time frame and trend is commonly measured by the ADX.
Multiple Time Frame Trading Methodology
Here we would see a threshold of 20 being broken on both time frames at the same time. But if you bought this – of course, you can see that the market continues to go down. Then, let’s look at this here. As I moved my crosshairs over, look on the daily chart and see when it moves to the next bar. I’m moving all of these bars over on the 60-minute chart. And all of this happens – all that price activity happens until they hit literally that bar right there. And that is when the ADX actually gets above the threshold of 20. In the meantime, it’s going down. Well, what I mean first of all, psychologically, that’s going to be really challenging to deal with, right? So, if you get into the market and it moves against you, you will freak out.
It just wasn’t a good confirmation anyway. Some people do it the opposite way. They would say ‘I look for the entry on the daily chart and then I look for a more precise entry – the 60 minute’. Now, I’m looking for my setup on the daily chart – I’ve got an ADX above 20 and now I want my signal over here on the 60 minute. Well, the ADX has already moved up on the 60-minute chart and it is moving back down. So we’ve got to wait for it to get back below the threshold of a 20. And the problem is it actually keeps going up even though the ADX is going down, so markets going up and you’re missing out on all that and now you’re frustrated.
Multiple Time Frame Trading System
Another psychological challenge is the frustration of the market moving all the way up there without ever getting a new trigger on the short-term chart. So let’s move forward here. The ADX gets back above 20 here and again, it’s actually above 20 on both time frames. That looks good, right? It looks great. Except for, again, the same problem on the 60-minute chart, the market actually goes down and we’re stuck with a psychological challenge of hanging in there while the market moves against us watching our P & L go red and it’s not an optimal entry. It is not a very precise, accurate entry. If you want to learn how to nail with precision cycle highs and lows where you don’t get stumped out like this or you don’t have to hang in there while the market moves against you, then just send me an email at Barry@TopDogTrading.com
I’ll be happy to share with you my cycle indicator which has amazing precision – one to one and a half bar range, precision cycle highs and cycle lows, so you don’t have to suffer through that. Anyway, the market goes down. Either you will get stopped out or you will suffer mentally while the market moves against you. And now, we have that signal there – it goes against us, comes back down, and look what happens on the 60-minute chart, comes back down below our threshold of 20. We don’t want to get it. We got to wait. And now it comes back up above, and now we get another signal. But look at all the profit we left behind us now.
Multiple Time Frame Indicator
We’re getting in like midway in the move and this again is going to mess up not only our win-loss ratio but our risk-reward ratio because we’re getting in so late. One of the most common sayings in trading is keeping your losses small and let your winners run. I went out doing either one of those with this technique. Our losses are either big or we’re allowing them to be big because we didn’t know that mark was going to come and turn back up. It could have gone continue to go down and then our losses would be really big. On the other hand, we are not letting our winners run because we’re not getting in at a low enough point in order to get a nice reward, a big win.
So it goes up and we make a little bit on that one. That’s fine but it’s not optimal. And that’s the point – to optimize our entries. Again, we get another long signal here and ADX is above 20. But, again, if you bought there, it moves down, mixed lower lows and then it’s just a mess. Why is it a mess? You’re dealing with a one to 24 ratio and your signals on the long-term chart are not going to give you or either way, whether you’re starting with the setups on the long-term chart or sitting with starting with setups on the short-term chart, the two are not giving you timely signals, so it messes up everything in your trading: your risk-reward ratio, your win-loss ratio, your psychology of having to hang in there.
Multiple Time Frame Trend Indicator
The market moves and even a six or one to six ratio is not good enough. I used to trade one to four ratios. But my favorite now is one to three ratio and I find that that works very well. So when you’re setting up your charts, whatever time frame you’re using, to me, the optimal ratio between the two charts is one to three. And I have found that that gives me very timely confirmations. The signals on the two time frames are very tightly correlated so that I don’t have to sit there and suffer through the volatility of waiting for when chart to catch up with the other.
Rubber Band Trade Strategy
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BTW, if you’re interested in the indicator that I use personally for very precise entries and exits. I’m happy to share that with you. Just send me an email at Barry@TopDogTrading.com, and I’ll show you how to get access to that indicator.
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