Candlestick Trading Blog

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Why do we need to use multiple time frame trading?

The answer is simple - it will improve the efficiency of our stock market investing strategy. We tend see the predominant trend using a higher time frame than what we intend to use to select positions, and we tend to use a lower time frame to actually enter the trade, hence the term “multiple time frame trading”.

For example, you may want to use the daily stock chart patterns to decide on a particular trade, but you use weekly charts to see the major trend. Suppose you see an uptrend in the weekly chart. In this case your tendency is to only trade long positions. Therefore you will use entries in the daily charts to enter long positions only. If the candlestick patterns indicate sell signals, you will just exit your long positions. In other words, you don’t short sell.

Suppose, on the other hand, you see a downtrend in weekly Japanese candlestick charts. In this case your tendency is to only trade short positions. Therefore you will use entries in the daily charts to enter short positions only. If candlestick buy signals are seen, you will just exit your short positions. In other words, you don’t buy long positions.

In using both the daily and weekly candlestick pattern formations in the above examples, you would be utilizing multiple time frame trading with two time frames. Now comes the issue of timing the entries into trades. You may begin using the hourly charts to time your entries. Suppose the daily and weekly charts are in an uptrend. We will enter a long position or add a long position when the hourly chart gives us a candlestick buy signal. Suppose the daily and weekly charts are in a downtrend. We will enter a short position or add a short position when hourly charts give us candlestick sell signals. This time frame would be used solely to improve the timing for entries and not be used to exit trades. For exits the signals generated in the daily charts would be used.

So how would you incorporate multiple time frame trading into your basic knowledge of stock investing concepts? Take three charts of the same security, the weekly chart, the daily chart, and the hourly chart. The daily chart would be used to trade and the weekly chart would be used to see the weekly trend. Assuming the weekly trend is up, the information will be used only to trade long positions in the daily chart. The daily chart can be used to look for buy opportunities and the hourly chart can be used to find the desired entry points. For entering additional positions, buy opportunities in the hourly chart can be used. We would exit based on the daily chart only, because we were trading based on the daily chart.

In the same way, trading short may be preferred when the weekly chart is in a downward trend and the daily chart generates a sell opportunity. Additional positions are entered whenever sell opportunities are seen on the hourly charts.

For stock market daytrading, the 5-minute, 15-minute, and hourly charts can be used when trading the 15-minute chart. Or the 3-minute, 5-minute, and 15-minute charts can be used when trading the 5-minute charts.

Hopefully, the tips given above will greatly enhance your multiple time frame trading techniques and improve your overall stock market timing strategies.