Part 33 Technical Analysis – How and why use different time frames

Best Binary Options Brokers: 2020 Ranking
  • Binarium
    Binarium

    Best Choice! The leader in our ranking!
    Perfect for beginners!
    Free Demo Acc + Free Trading Education!

  • Binomo
    Binomo

    Good choice for experienced traders!

Part 33: Technical Analysis – How and why use different time frames

Every trader has his or her favorite timeframe, in which they spend most of their workday. It is quite common, and it is the same case with me, but it is still necessary to know what the lower and higher time frames look like. You want to know why? Or how to work with timeframes? If so, continue reading and take another look at the markets.

“The trend is your friend”

You’ve certainly heard these words several times. It may already sound like a cliché, but it is still valid. To put it simply, if the market is in a downtrend, in the long run, buying long is, at least statistically speaking, riskier than trend trading, i.e. selling short.

It may sound quite clear, but in practice, this is very often overlooked. Why? The reason is simple. I spend most of my business within a 30-minute timeframe. This very timeframe can provide me with the perfect signal to buy, but the market can be in a long-term downward trend from a daily, weekly or yearly perspective. So, I have a trading signal according to my strategy, but I should nevertheless be cautious because though I am working within a small timeframe (where I want to buy), the market is declining in the long term.

Although this signal from the 30-minute timeframe may be strong, I would be trading against a long-term downward trend, which may not pay off.

Market analysis

Though this depends on you and your business style, you should always be aware of the general overview of the market. Personally, I am starting to analyze the market in long timeframes. Feel free to use weekly or monthly candles. Through this view, you will be able to see the long-term mood on the market.

Determine the direction of the trend, write down important supports and resistances (it is good to describe everything, e.g. “Support from a monthly timeframe”), and it is important to have all time zones view turned on or you will not be able to see this support elsewhere).

Example of EUR/USD Quick Analysis on a Weekly Chart

You now have important levels, you know the long-term trend, and you can switch to a day view, for example. From there you do the exact same thing. Finally, you can switch to 30M, if you trade in an even lower time zone, for example, 5 minutes, I would add a 4H timeframe to the analysis, but it’s up to you. This trading aspect requires common sense, because analyzing each timeframe is meaningless, as you would be overloaded with data and receive conflicting trading signals.

Zoom in on an already analyzed graph. Now on a daily chart.

As you can see in the picture above, the lines drawn from the higher timeframes will serve as a good orientation tool when zoomed at.

Best Binary Options Brokers: 2020 Ranking
  • Binarium
    Binarium

    Best Choice! The leader in our ranking!
    Perfect for beginners!
    Free Demo Acc + Free Trading Education!

  • Binomo
    Binomo

    Good choice for experienced traders!

Market speed

Sometimes it so happens that the market goes sideways, and nothing really happens within your timeframe. Or, on the other hand, the market can make a significant move, but it is not enough to activate the position within your time frame and the market suddenly cools down (this often happens RIGHT before the closing of the market on Friday night, or before handing over a trading sessions between world centers).

In these cases, it is again appropriate to look at leastwise 1-timeframe below. So, if nothing happens at 30M (30 minutes), I look at 15M or maybe 5M. Of course, I recommend this procedure to be backtested on a demo account, but your trading strategy should work within other timeframes and it is such an interesting opportunity.

Timeframes interweaving

An overview, drawing of important lines from other timeframes (typically longer timeframes) is a great asset for trading. It will offer you a further view of the market and can serve as a good filter. For example, if I evaluate downtrend on a daily basis, I won’t even enter 30M by buying. This is just an example; you can, of course, set it differently and make it tailor-fitted to your trading strategy.

Finally, I would like to add that in some software, for example, Ninja Trader, it is possible to program or download from the internet functions like an interweaving timeframe. Then you can view the moving average from another timeframe. Consider this simple information, nothing else. To begin with, it will be enough to look at other timeframes, take notes, and draw important levels. We will discuss more advanced analysis within the rest of this series.

Let us know in the comments: What timeframes do you use?

Want to know more about Trend lines? Read the articles below:

Author

More about the author J. Pro

Unlike Stephen (the other author) I have been thinking mainly about online business lately. I wasn’t very successfull with dropshipping on Amazon and other ways of making money online, and I’d only earn a few hundreds of dollars in years. But then binary options caught my attention with it’s simplicity. Now I’m glad it did because it really is worth it. More posts by this author

Time-Frames

There are different periods in which a currency pair could be charted: monthly, weekly, daily, hourly, 30-minute, 5-minute, etc.

Each timeframe has its unique trend; this is the reason why there is no absolute trend for any currency, take the following charts for example.

EURUSD Hourly Chart
EURUSD Daily Chart

In these charts, a swing trader focusing in the 1H chart could assess: well there is no trend (ranging market) right now for the EURUSD while a long-term trader could assess: the trend for the EURUSD is clearly up. Which trader is wrong? No one, both of them are correct. Both of them have effectively determined the trend in the timeframe they are focusing on.

Of course, the market condition in the 1H chart is most likely to continue for the next couple of days while the market condition in the daily chart is likely to continue for the next month or so.

The same goes when we use indicators. Sometimes the same indicator could be signalling the opposite signals on the same currency pair on different time frames.

Take for instance the following charts:

G5BPJPY 15 Minute chart

GBPJPY 4H chart

On the first chart (15min) the stochastics are in an oversold situation however, at the same time, in the 4H chart the stochastics did give a sell signal (crossing from the overbought territory to the neutral territory). The reason for this simple, remember all indicators go back n-periods to make a calculation, in this particular case, the 7 period stochastics in the 15 min chart went back 8 candlesticks to complete its calculation (1.75 hours). The stochastics in the 4H chart also represent 8 candlesticks but those 21 candles represent around 1.5 days worth of data. The market conditions are completely different during those periods.

Obviously, it is better to trade when many timeframes indicate the same market condition (i.e. both, the 15 min and the 4H chart indicate an oversold condition). When this happens, the probability of success of the given signal increases enormously.

Is important to realize that the longer the timeframe the more impact it will have in the market. For instance, an oversold condition in the 4H chart is more important than an overbought condition in the 15 min chart. More important because the “signaled market condition” will last for a greater time in longer time frames than in the shorter time frames.

Which timeframe should I use?

When trying to decide which timeframe to trade in we must take in consideration two important factors: the time dedicated to your trading and your personality.

How much time a day/week are we going to dedicate to our trading? Obviously if you have a day job and do not have the possibility to monitor your trades, then it would be better to focus on the 4H or 1H chart, and even daily charts can work out. If there is a possibility to monitor your trades then you can use the 30 min charts.

On the other hand, if you are a full time trader, then you have the possibility to trade shorter timeframes such as the 5 or 15 min charts.

However, we must almost consider that when you are a full time trader there is a chance that trading shorter timeframes does not fit your personality. The same goes for traders with a day job, there is a possibility that trading the longer term just will not work. I have a friend who started trading the FX market using the 1min chart. His trading wasn’t going the way he expected so he moved to the 15 min, then to the 30 min and finally to the 1H charts, where he felt most comfortable trading (and of course profits also increased).

So to summarize, you should use the time frames that better fit your personality and time requirements, and the best way to know which one fits you better is by trading as many time frames as possible, then choose the one you felt most comfortable with.

How To Use 1 & 4 hour Chart Time-Frames to Confirm Daily Chart Signals

A common question beginning traders ask me is whether or not I use intraday or “lower time frame charts” and if so, how do I use them?

For the most part, the answer is yes, I do use intraday charts. However, (you knew there was going to be a however, right?) there is a time and place for everything, especially intraday charts. It’s important you understand when to use them and how to use them. This is something I go into much greater detail on in my advanced price action trading course, but for today’s lesson, I wanted to give you a brief overview of just how I incorporate intraday charts into my daily trading routine.

This tutorial will demonstrate several of the core ways I use intraday chart time frames to provide additional confirmation to daily chart signals as well as manage risk, manage position size and improve the risk reward of a trade.

My favorite intraday chart time frames to trade…

Typically, people who email me about the intraday time frames want to know if I ever trade solely off of these lower time frames. The answer is, yes, I sometimes do trade the 1-hour or 4-hour charts on their own without taking into account the daily or weekly time frame. However, 90% of the time I use the 1-hour and 4-hour charts to confirm the higher time frame signal, mainly the daily chart time frame.

In this way, the intraday charts work as an extra point of confluence to give weight to a trade and further confirm whether or not I want to enter it. The other big advantage of the intraday charts is that they can allow me to fine-tune my entry to achieve better risk management. More on these topics later.

  • The most important thing to remember is that I never go lower than the 1-hour chart because from my experience, any time frame under the 1-hour is just noise. As you go lower in time frame, there are increasing amounts of meaningless price bars that you have to sift through and this makes the story of the market cloudier and cloudier, until you reach a 1-minute chart where you are basically just trying to make sense of gibberish.
  • I only look at the 1-hour and 4-hour charts when I am looking at intraday time frames. The anchor chart that I base most of my trading decisions on is always the daily chart time frame.
  • For those who like to look at weekly charts, the concepts in this lesson could be applied there as well. You would essentially use the daily charts to confirm weekly signals and add confluence to them, as well as fine-tune your risk management. It should be noted, I rarely trade off weekly charts alone, but for the die-hard weekly-chart traders, keep this in mind when reading the rest of this tutorial.
  • Remember, it is NOT essential to trade the daily chart with confirmation from the intraday. It’s just something you might want to implement as you become more advanced and have mastered the basics of trading daily chart time frames.
  • Remember, this is NOT day trading! The length of time we are holding these trades is still intended to be a full overnight position or multiple days / weeks. Remember, the initial trade trigger is still the higher time frame chart.

Using Intraday Charts for Second Chance Trade Entries

Everyone hates missing out on a perfectly good trade, myself included. Luckily, there are a number of different ways you can get a good second chance trade entry on a signal you initially missed.

One of those ways is by use of the 1-hour or 4-hour charts to look for a signal a few hours or even days later, to re-enter in the direction of the original daily chart signal that you missed.

In the example below, we see a clear-as-day pin bar buy signal from support in the S&P500, circled in the chart below. If you missed this one, you were definitely kicking yourself…

However, for savvy price action traders, they know a second-chance entry will often present itself on the intraday charts not long after the daily signal fires off. Notice, in the chart below, we see a fakey pin bar combo pattern formed shortly after the daily pin bar. Also, notice there was a larger 4-hour pin bar that formed the same day as the daily signal, adding more confluence to that daily signal.

Using Intraday Charts to Confirm Daily Signals

Sometimes, you may see a potential daily chart signal but you don’t feel convinced. It may not “look right” to you and you feel it needs some more confirmation as a result. This is normal, and it happens often.

You will sometimes then get a 1-hour or 4-hour chart showing a super-convincing signal after the daily one you weren’t sure about.

Notice, in the chart below, we had a bullish tailed bar at support in an up-trending market. But at the time that bar formed, you would probably be wondering if it was really worth taking or not, due to its bearish close and the preceding swing lower.

Intraday chart to the rescue. Notice the two convincing 4-hour pin bars that formed around the time of the above daily chart bullish tailed bar. You could have used these 4-hour pins to further confirm your feeling about the daily chart signal you weren’t sure about.

Sometimes, you will see a daily chart signal forms but does not have any real obvious confluence with a strong trend or key chart level. In these cases, you can rely on a clean intraday signal to be the confluence that you need to either enter the trade or pass on it.

Notice in the daily S&P500 chart below, there was an intense sell off in early 2020. It would have been very tough for most traders to buy right after such a strong sell-off. There was a lot of bearish momentum and pressure overhead and this would have cast doubt on the daily chart pin bar signals seen below.

The 1-hour chart would have helped us in this situation. As seen below, back-to-back 1-hour chart pin bars formed at the time of the above daily signals, indicating further confluence and giving us further confirmation, it was safe to enter long. Also, entering on these 1-hour pin bars allowed a much tighter stop loss and thus better risk / reward profile as will be discussed in the next section.

Using Intraday Charts to Tweak Your Risk Reward and Position Size

As we know, the daily chart requires us to use wider stops most of the time (unless we use the 50% tweak entry as exception), so in most cases, when we use the 1 or 4-hour intraday chart, we can implement a tighter stop loss and adjust position size accordingly. This allows us to substantially improve our risk reward because the stop loss distance is reduced and the position size can be increased as a result, but the profit target remains the same.

This is not going to be the case on every trade on intraday charts, sometimes the risk management ends up being very similar to what it would have been on the daily chart on its own. But there are many instances where it works out to where you can double or triple the potential reward on a trade by utilizing intraday signals.

In the Dow Jones daily chart example below, we can see a clear pin bar signal formed and if you had entered near the pin high with the classic stop placement of the pin low, you’d likely get a 2R reward, POSSIBLY 2.5 or 3R at the most.

The 4-hour Dow Jones chart around this same time, fired off a 4-hour pin bar shortly after the daily pin above, providing us the potential to essential trade that pin bar instead, this reduces the stop loss by about half and allows us to double the position size, upping the reward to 6R max instead of 3R. Maximizing winning trades is essentially how you build a small account into a big one and how you make big money in the markets.

A similar situation in the example below. A nice GBPJPY bearish daily pin bar formed, albeit a pretty wide one. Your stop loss would have been over 300 pips from pin high to low on this one, greatly limiting the potential Risk Reward:

The 4-hour chart fired off a much smaller pin bar after the above daily pin. This allowed us to turn a 1R winner into a 5R or more potential.

Conclusion

The intraday tweaks and ‘tricks’ that I showed you in today’s lesson are just some of the ways I utilize the 1-hour and 4-hour charts with my three core price action trading strategies in my trading plan.

Price action trading does not simply consist of just looking for a few candle patterns on a chart and then placing a trade, not even close. There is a lot more involved. The process of actually finding and filtering trades, managing risk / reward and then executing the trade and managing it both technically and mentally, is something you can’t learn overnight. There is a technical analysis side and a mental side to every trade, and both parts have to be learned and practiced over and over before you truly gain the ability to make consistent money in the market.

After reading today’s lesson, I hope you have a better understanding of how to use the intraday charts properly, unlike most traders. Don’t make the mistake of using the intraday charts to micro-manage your position and over-trade. This is wrong and will cause you to lose money.

Instead, utilize the tips and tricks learned in this lesson and the others I teach in my trading course, to use the intraday charts to your advantage. Trading is about making the most out of a good signal, and this is what I use the intraday charts for, not to over-trade or meddle in my trades like most traders do. I hope you too can now use the intraday charts to your advantage by implementing the theory and concepts in this tutorial to ultimately improve the odds of any given trade working out in your favor and maximize its profit.

What did you think of this lesson? Please leave your comments & feedback below!

Best Binary Options Brokers: 2020 Ranking
  • Binarium
    Binarium

    Best Choice! The leader in our ranking!
    Perfect for beginners!
    Free Demo Acc + Free Trading Education!

  • Binomo
    Binomo

    Good choice for experienced traders!

Like this post? Please share to your friends:
Binary Options Trading Education
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: