How to Use Multiple Time Frames in Your Technical Analysis

When a non trader asks me how the market did today, the answer is not as cut and dry as they may expect, because it is a matter of time frame. I may tell them I shorted the gap fill on the 5 minute chart at resistance and then covered and went long after it put in a double bottom. As the 5 minute put in a bottom and rallied, the hourly triggered a buy set up from minor support. After rallying all afternoon, the hourly took out major resistance at the end of the day which triggered a break out play on the daily chart so I kept enough shares for a swing trade and sold the rest.

When each bar on a chart represents one year, we call it a yearly time frame. When each bar on a chart represents a month, it is called a monthly time frame. The yearly and monthly time frames are used to spot multi year cycles and trends. Theses time frames are typically to big for mere mortals to trade, they are used for academic purposes.

Core Trader’s Time Frame

The weekly time frame is the area of focus for long term traders, core traders. The core traders analysis trends, support, resistance, and price patterns on the weekly charts. He will consult monthly charts to ensure he is in line with the greater trend. These traders may also consult the daily charts in order to fine tune trade entries and exits.

Core traders can easily do all of there analysis and planning after the market closes. Analysis should include major market induces, sector induces, bonds, currencies, and any other market that can give clues about the current market cycle phase. Trades may last from a few weeks to several months.

Swing Trader’s Playground

The daily charts are the play ground of swing traders who typically take positions that last from a few days to a few weeks. Swing traders consult the weekly charts to ensure they don’t trade against the greater trend, resistance, or support. Swing traders can fine tune entries and exits by analyzing the hourly charts.

Like core traders, swing traders also monitor multiple markets and sectors to determine where funds are flowing. Swing traders look for relative strength and relative weakness relationships between stock and their sectors, between sectors and the market, between the market and other markets such as bonds and currencies.

Day Trading Options

Day traders have the greatest flexibility. They may choose a time frame that offers the greatest opportunity. What may be a sideways, unprofitable market for swing traders, could be a tradeable trading rage on the 5 minute charts. Day traders also have the advantage of entering longer term trades from compelling set ups found on the shorter time frames.

A day trader whose primary focus is the 15 minute time frame should consult the hourly charts to ensure he is not trading against the bigger time frame. 5 minute charts may be used to fine tune entries and exits. Stop and targets must be determined by support and resistance levels found on the 15 minute chart IF you want to call it a “15 minute trade.” Don’t get your time frames mixed up.

Mixing Time Frames

In all the examples I have reviewed above, I have suggested the use of three time frames to increase your odds and profitability. I must clarify one thing. Your primary time frame is determined by which chart you use to set your stop loss and calculate your share size. You can fine tune a swing trade entry from a 5 minute chart, but if you set your share size based upon the last line of support on the 5 minute time frame, this is not a swing trade. It is a 5 minute trade that has triggered a swing trade. If you place your stop and size your trade based upon daily support levels, you have a swing trade that has the advantage of a precise entry from the 5 minute chart.

Use multiple time frame analysis to your advantage without “mixing time frames.” One of the biggest problems you will have with mixing time frames is an increase in your stop out rate. Using a 5 minute stop on an over night trade is a great way to leverage up and increase your Reward to Risk Ratio, but be wary of a higher stop out rate. A potentially bigger problem to avoid is share sizing a swing trade with 5 minute stops. An opening gap against you could wipe out all of your profits for the month. To add insult to injury, the trade may still be valid on the daily charts and ultimately produces a nice profit without you on board.

Learn how to use multiple time frames correctly and share size accordingly!