13 Feb The Magic Allure of Multiple Timeframes
The Magic Allure of Multiple Timeframes
Feb. 13, 2023
If I’ve been winning tennis matches easily for a month, and I’ve just won four matches to reach the final of this tournament, and I get an early break to go up 3-love, what are the odds I’m going to win?
Pretty high, right?
Conversely, if I’ve lost in the first round five times in a row, and I only won my match this week because my opponent defaulted due to an injury, and I hold barely hold serve to go up 1-love in this match, what are the chances I’m going to win?
That’s the allure of multiple timeframe trading.
It utilizes a ton of data going all in one direction to make a high-probability decision about the current momentum. It allows us to ride a big wave or easily determine if we’re fighting upstream.
We know momentum is real. We know momentum is the most tested and verified method of trading.
So using a lot of previous momentum to make a decision seems like a very smart thing to do.
But is it? Can the numbers back it up?
It’s not a slam dunk (that’s two sports references).
Here’s the problem.
Let’s say we’re trading on an hourly chart and the monthly momentum has been up and the weekly momentum has been up. Great!
But that has almost nothing to do with the hourly chart.
Even though the long-term momentum is up, on a short-term chart it’s pretty much 50/50.
Weekly traders and hourly traders have almost nothing in common.
In that case, multiple timeframe trading “doesn’t work”.
If we’re trading the daily chart, though, and the weekly and monthly momentum is up, then we have something. If an instrument has been going up all week and for the past several weeks, and this instrument starts going up again on a daily chart, we have a high likelihood of momentum carrying through.
In short, if we can keep the timeframes related, then maybe we can find a potent edge.
How close is close enough? As always, it depends. But a factor of 5 is a good place to start.
A daily chart times five gets us to a weekly chart. A weekly chart times five gets us in the neighborhood of the monthly chart.
Or, if we multiply a 5-minute chart by five, we get to a half-hour chart. And multiplying the half-hour chart by five, we end up at a 2 to 4-hour chart.
Using that as a guideline should allow us to use larger timeframes that have an actual effect on the trade we’re about to take.
In theory, at least.
In our next Newsletter, we’ll look at some charts to see if this idea holds up.
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