Multiple Time Frames

Good morning Folks and Happy Friday.

This will be the last post for the week. I will try to do a video this weekend. It's a big weekend, I have some friends coming in from out of town to celebrate making it through another year of life. Odds are I will be doing my best to damage some brain cells. I hope the posts are helping. Have a great day trading.  

Multiple Time Frames

I stated earlier that aligning a stock on multiple time frames can give you a powerful setup. Once you establish what type of trader you are going to be. You need to start familiarizing yourself with the time frames that work best with your style of trade. The time frame widows can vary to each individual’s personal preference. There is nothing that says if you are a day trader you must work within the daily, 30 minute and 5 minute time frames. I know of traders that will use the daily the 15 minute and the 3 minute timeframes. This is something you will have to play around with to find which time frames provide the best results for you. What is most important is that you understand and fully comprehend the concept of aligning a stock on multiple time frames. This was something I had a very difficult time with when I first started out on my journey of being a day trader.  I still remember the day when I was trading a stock and all of a sudden the light bulb went on. I saw the multiple time frame alignment and I executed the trade with complete confidence, it was a huge turning point for me. So why is multiple time frame alignment so important? It isn’t a guarantee that your setup will succeed but it does add to the validity of the setup if you can get an alignment on multiple time frames. You may choose to work with only two time frames I personally like to use three.

Figure 8  Breakout on multiple time frames Day trade

Figure 9 Breakout on multiple time frames Swing

Figure 10 Breakdown alignment swing time frame

Figure 11 Breakdown alignment day trade time frame

As you study the examples, notice how the different time frames align at specific price points. By identifying the breakout or breakdown area on multiple time frames you should be able to find your ideal entry point which will give you a higher probability of success with your trade. By looking at stocks on multiple time frames you can also identify areas of congestion where there is likely to be built up supply; former price resistance or support, moving averages, and other indicators you may have a preference for like Bollinger bands, and Fibonacci levels. Knowing where these areas are on the daily for example could help your determine what your risk reward would be on a day trade before hitting some form of resistance or support. See the example below.

 

Figure 12 Support and resistance areas Day trade

So taking the example above one could assume that there is relatively strong price support on the daily at 2.60 with the 50 day moving average. There is also support on the 30 minute and the 5 minute at the 2.60 level. One could also assume from the daily that there is likely to be resistance at 3.59 and stronger resistance at the 200 day moving average around 3.85. Entering a trend line break at 2.72 would be risking 12 cents if you placed your stop at 2.60. Knowing where the resistance is on the daily helps you set your targets. Typically there is at least some resistance at round numbers which I will go into later when we go through individual setups. $3 may be the first target to scale out some of your trade. 3.30 may be the second target since there has been some congestion there and 3.59 may be your final target. If the trade goes perfectly you are risking 12 cents to make 87 cents which is roughly an 8 to 1 risk reward ratio. The worst case scenario is risking 12 cents to make .28 cents if it only hit 3 dollars which is still a 2 to 1 risk reward scenario. Paying attention to volume on the breakout will help you determine what target the stock is likely to achieve. Looking at multiple time frames and aligning them should be a critical component for every trader regardless of the type of trader they are long or short biased, or the duration they intend to hold a stock.