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Multi-timeframe trading

I always try to increase the probability of each and every trade becoming profitable. One such way is to use multiple timeframes when you are considering entering into a position. I use this method for intraday trading: although I will usually stay in the market for no more then 6-12 hours I am still using charts from a completely different scale to support my decision.

For my trading I use three different timeframes before making any decision:

  1. Daily chart over 24 months
  2. Hourly chart over three months
  3. 15-minute chart over seven days

The daily chart will be used in order to understand the underlying trend of the market overall. Taking the USD/CHF pair as an example, according to my analysis we are currently in a downturn towards the lower boundary in a bullish run. This implies two potential and opposite trades:

  1. Long: assuming that I am correct about the trend there is a high probability the price will rebound once it touches the lower bound of the trading channel.
  2. Short: the argument is the same but, why wait? We can go short now and exit when the price hits the lower bound.

The hourly chart tells a different story. From the beginning of January 2010 to the 19 February the market was in a bullish trend, a 45-degree positive incline. From February the trend has run out of steam. The rising bottoms are gone, replaced by falling tops everywhere. This suggests that the bullish run is over and we are now in the midst of a bear move.

This is enough information for me to make a decision which way to go. I will take the downside, short on the US dollar. My target would be the bottom of the channel on the daily trend and my Stop Loss will be placed around what I see as the closest resistance point (1.0737).

In order to fully optimise the potential of the trade I will also drill down to the 15-minute chart. This chart will not affect in any way the decision whether to go long or short; it will only determine the optimal entry point.

For this I will be referring to the Elliott wave principle. Assuming the main movement is down, one can assume we are now in wave four of the movement. All we need now is a beginning of a downturn indicating that wave five will commence in order to get into the position.

To summarise, we use the daily chart to understand overall market direction and the type of the trend (direction, uniformity, stage). The hourly chart will be used to determine the direction of the trade and the 15-minute chart to locate the optimal entry point.

Good luck and happy trading.

Shai Heffetz

Published: 15 March 2010


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