Timing Entries from Lower Time Frames
Remember the general three-time-frame structure: there is the time frame actually being traded (the trading time frame), and a higher and a lower time frame relative to that trading time frame. This is a somewhat arbitrary structure, but it is important for traders to define their intentions and the relevant time frames clearly.
It is difficult to isolate cross-time-frame influences because, in reality, these flow both ways. The higher time frame (relative to the trading time frame) usually can suggest which trades are more likely to reach their targets and which are more likely to fail; the bigger-picture context provided by the higher time frame can be a valuable layer of information.
In contrast, lower time frames are usually used in two ways: to time precise entries into trading time frame patterns or to monitor price action and conviction that may not be visible on higher time frame charts.
Timing Entries from the Lower Time Frame
There have been hints of using the lower time frame to find exact entry points in the previous section. For instance, an alert trader could have used the tests of support and resistance on the higher time frames in Figures 7.29 and 7.30 to enter at the beginning of strong trends on the lower time frame. This is a general plan for a powerful way to use the lower time frame as a timing tool into higher time frame patterns: at important structural points such as tests of support/resistance or previous pivots on the higher time frame. Think of it like this: If you stand on a chair and step off, you will very predictably fall a short distance and hit the floor—no big deal. All other things being equal, this is what breakouts on any time frame are like; an equilibrium level is disturbed and a predictable move of moderate size usually results. However, now repeat the experiment of jumping off a chair, but this time position the chair at the edge of a cliff. The step off the chair is still one small step, but now the result is out of all proportion to what you would have expected from that simple step. This is what happens when the moderate and predictable momentum from a lower time frame break feeds into a structure that is already at the tipping point on a higher time frame. These have already been formalized in some of the trade entries in Chapter 7, but this is a rewarding area of study for discretionary traders.
Reading Price Action on Lower Time Frames
Another way to use the lower time frame is to add depth and richness to market structure on the trading time frame. Traders who are watching order flow and monitoring markets closely during the trading session usually develop an intuitive sense for price action in those markets. However, there is a practical limit to how many markets can be followed this way, and some traders will be unable to devote full attention to price action while markets are open.
A very skilled intraday trader might be able to track two dozen markets reasonably closely, but most traders, especially developing traders, will find it difficult to monitor more than half a dozen at a time. In addition, many traders prefer to trade higher time frames, and they make an effort to not focus on the short-term fluctuations in the markets they trade.
For traders in these situations, a careful analysis of lower time frame market structure can inform their understanding of price structures on the trading and higher time frames. For instance, if the trading time frame is trending, how is the lower time frame moving? Are there clear consolidations and good breaks that are indicative of a healthy trend? Are there potential overextensions and exhaustions on the lower time frame, or signs that momentum is starting to fail on that time frame? If the higher time frame is engaging important resistance, what is happening on the lower time frame? Is there evidence of price rejection, or are there consolidations near the higher time frame resistance that could presage a break of that level? This is definitely a blend of art and science, but these are key considerations for traders who do not monitor every tick of every market they follow—in other words, nearly everyone.
Summary of Multiple Time Frame Analysis
- We have just scratched the surface here; to make best use of these concepts they must be internalized, which takes repeated exposure, deep thought, and dedicated study. However, we have covered most of the important core concepts, and, taken individually, they are not complex:
- There are not always meaningful multiple time frame considerations. The best examples are obvious and clear. Do not get too creative; if you have to work hard to see them, they probably are not there.
- When a higher time frame is trending, patterns that work with that trend direction on lower time frames will be reinforced. Win rates will be higher, and moves will be sharper and cleaner. When a higher time frame is trending, patterns that run contra to that trend on lower time frames will tend to abort. Though there can be impressive countertrend runs on lower time frames, these have limited expectations and they tend to resolve into with-trend patterns in the higher time frame. Trends that are countertrend to higher time frame trends tend to end at ideal entry points for with-trend entries in the higher time frame trend.
- When the higher time frame is ranging, expect sharp trends on lower time frames. Some of the best trends actually occur in the context of higher time frame consolidation.
- Breakouts that might be insignificant by themselves can be reinforced if they occur at critical tipping points in higher time frame structures. When this happens, we can time entries into the higher time frame trades with precision from lower time frames.
- Ranges on lower time frames are often continuation patterns on higher time frames. This can provide a bias for a directional breakout of these ranges.
- The character of price action on lower time frames often provides insight into the relative buying and selling pressure behind the market’s movements. There is usually more noise on lower time frames, so be aware of this complicating factor. Armed with these ideas and the examples in this chapter, start to examine markets and trade setups with these ideas in mind. These multiple time frame considerations can add confidence to some of your best trades and may give you justification to cut some losing trades more quickly.