Just about every good trader I know analyzes and trades using more than 1 time frame. (our theEquilibrium just did a great analysis of Apple on 3 Time Frames).  Whether they’re daytraders or swing traders, using multiple time frames means focusing on the price action you’re waiting to attack but also being aware of the big picture.  There are multiple cross currents in each time frame, a seemingly safe trade in one time frame could be a suicide trade in another time frame with someone waiting to ambush you.  Emphasizing multiple times is the reason we created the show “Multiplicity” here on FINZ.tv.

For me, trading is most like driving.  When you’re driving in one lane, you’re focused on the car in front of you, just as if you’re trading on the 15-minute time frame you’re focused on that chart.  However, when you’re driving you can’t just stare at the license plate in front of you.  You have to scan the lanes beside you, check your mirrors, and scan the big picture with the road, street lights, pedestrians, etc.  So for example, traders using the 15-min time frame would check a higher time frame (30-min or 1-hr) for road conditions while honing in on the 5-minute time frame for precise entries. (There are 3 5-min bars in a 15-min bar, so one could “anticipate” the pattern on the 15-min bar by watching a group of 3 5-min bars)

(my trading screen of POT in 3 time frames [left to right]: 5-min [trade execution frame], 15 min [main time frame], daily)

Maybe it was because I had a few days off, but Wednesday (6.10.09) was a fun and successful trading day for me.  I had mentioned on twitter Tuesday night that agriculture stocks like Potash (POT) and Mosaic (MOS) had nice bounces off of the 20 day moving avg on the daily charts on Monday, which made me want to get long.  However, Tuesday’s rally in POT already took it close to prior resistance at $120 such that risk/reward wasn’t tempting.

Then Wednesday morning pre-market, the futures were very hot (up a lot) with the S&P Futures indicating the S&P gap and open above the important 950 level, S&P futures as high as 955 or so.  China said something about economic activity or the like being better, juicing up commies (commodities) overnight in the Asian markets.  The mental prep then was how to play a big gap day: I learned from a Linda Raschke seminar on INO.com that the probabilities are a trend day, though you don’t know if it’ll be a trend up or a trend down.  If the market had gapped above the 950 level and held for a few minutes, the many market participants with buy stops at 950 might have added buying fuel and caused the market to continue higher in a up-trend day.

However, the futures faded into the open to the 950ish Level on the S&P, not enough of a big gap to cause a trend day but suggest more of a chop (sideways) day.  As Alan Farley emphasized in “Master Swing Trader,” on sideways/chop/rangebound days don’t use basic indicators like MACD, RSI, and moving averages as they won’t work well and more likely give you false signals.  Play the ranges everyone else is, and recent tight range seems to be 930-950 on the S&P.  Buy at support, sell at resistance, rinse, repeat.

And that’s exactly what happened. The market opened near 950 on the S&P and sold off (everyone playing “sell at resistance”).  With some juice left from the Asian markets, commodity stocks like POT and OIH (Oil Service Holders ETF) held in for a bit but hit their own resistance.  POT resistance 120 on Daily chart and sold off with the rest of the market.

FIRST TRADE OF THE DAY

I actually shorted OIH instead of POT in the first 30 minutes, but their charts from Wednesday look nearly identical so using POT is enuogh to illustrate my point.  View the 5-min and 15-min charts below and see how the chart patterns and candlestick patterns line up, but tell a slightly different “aspect” of the story, giving us a more complete picture of the overall situation.   Also, see how the previous few days’ support and resistance levels are drawn in just in case!

POT 5-min time frame

POT 15-min time frame

The opening short with a stop at day high had good risk-reward, but only watching the 15-min time frame it’s just a series of red down bars, difficult to find a reference of where to cover the short.  Zooming into the 5-min frame, we see the “series of red down bars” looks more like a 3-wave push.  More aggressive traders or those who missed the initial short could even enter a short after the small pullback after “1 Push”.  But the probabilities at the end of the 3-wave push is a reveral up, so I was able to let a position run and cover the short close to the reversal.  Coinciding with the 200 moving average on the 5-min frame, the 3-wave push finished and reversed.

SECOND TRADE OF THE DAY

It was a clear reversal with a hammer at a support level, so a good low-risk entry to go long with a stop below the hammer candle on the 5-min frame. Also, reading 3 5-min frames as a “Word” you could anticipate a reversal candle on the 15-min frame as well. Thus, while operating in the 15-min frame you get in on a 5-min candle with a much more precise entry and tighter stop, allowing you to take a bigger position size as your risk is smaller.  I actually went long IWM (iShares Russell 2000 Smallcap Index ETF) which showed the same reversal pattern.

POT 5-min time frame

POT 15-min time frame

As we rallied into a previous resistance level and a doji then reversal candle in the 5-min frame appeared, I sold my long position and shorted the IWM. The doji and reversal candles in the 5-min frame lead to a doji reversal on the 15-min frame. But by using the 5-min frame in conjunction with the 15-min frame I was able to get out of my position without having to wait for the full 15-min doji signal to complete.

This reversal that led to a selloff during the day was news driven.  There was a bond auction that people were anticipating going into that doji reversal candle, and which after the news the market reversed and sold off.  The market prices in news instantly, so those that follow charts and price action react to the news before than any media or analyst can.

THIRD & FINAL TRADE

As both the market and POT came down during the selloff, the market stalled just below the 930 support then started to move up.  At the same time, POT found support at the uptrendline as drawn, also making a higher high.  I went long POT here AFTER the reversal seemed to have begun.  Again, because I got a good entry near the reversal point, I took a bigger position since my stop was very close.

POT 5-min time frame

POT 15-min time frame

With the confluences of market going up (most important, neve fight the market!!) and both market and POT finding support at a prior support level, the probabilities were good for a upside move.  Watching other stocks and sectors, the upmove seemed strong so I did not sell my POT position as soon as it neared prior resistance.  This was a lucky decision as we got the upside move and actually broke the daily double top (resistance level).  When POT faded to the breakout line, forming either a flag or the “handle” of a “Cup & handle” I added a second LONG POT position. It as great able to find a clean pattern like that and buying into a low risk, high probability pattern.  Finally, POT rallied into the close and I sold my POT longs at the close (since this was a day trade, must stick with discipline and not turn it into a swing trade.  Also, POT nearing 120 resistance again.)

Note that I don’t usually take this many trades! Or catch as many turns as I did. That’s why it was such a feel-good day!  As I explained before, if a setup only appears in one time frame but not any others, the trade might actually be dangerous so I might pass or play small on those setups. Only when multiple time frames align and multiple price levels, trendlines, or moving averages do the odds increase in your favor significantly.

Another important reason to use multiple time frames is: finding smooth air to fly in.  Different time frames will have various degrees of chopiness, noise, and clean vs. messy patterns.  If you can only use one time frame, you might get chopped up, spending a lot of emotional capital and comissions $’s trying trade patterns that don’t exist.  Meanwhile, you look on a different time frame, and the patterns are clear as diamonds.  For me, this day was trading more on the 5-min time frame whereas I usually prefer 15-min or higher because usually 5-min is too fast for me.  But today the clear signals were on the 5-min charts so correctly noticing and capitalizing on that awareness helped made my day.  As my mentor and good friend Quint Tatro of Tickerville.com has been expertly showing, the smooth air to fly in recently has been on the daily charts with small cap stocks.  This is Quint’s specialty and he has the particular skills and experience to successfully trade this way, and I’m slowly learning by his side in tickerville.com.

**Disclosure: no positions in Stocks mentioned **