Multi-timeframe trading

Multi-timeframe analysis involves analysing stock price charts in different timeframes to identify the broad trend and early entry and exit points. Trends are easily identifiable in higher timeframes, while the entry and exit are more clearly identifiable in the lower timeframes. A higher timeframe is a compressed version of a series of lower timeframe prices. Lower timeframes build the higher timeframes; therefore, reversals can be spotted early on.  

Markets are not linear and move in a cycle of an uptrend, intermediate correction and downtrend. An intermediate correction can be a potential downward reversal in case of an existing uptrend and can be a potential upward reversal in case of a downtrend. Therefore, it is essential to zoom in to the lower timeframe to identify if the price is going to add up to become a reversal or a mere pullback.  

How to choose timeframes? 

Choosing a timeframe depends on the time horizon that an individual market participant is seeking. A short-term trader would prefer a much shorter timeframe from weekly to daily or hourly. A swing trader may prefer an hourly timeframe, and to a few minutes. An investor, on the other hand, would prefer a larger timeframe like a monthly, weekly or daily. 

A combination of three timeframes is generally preferred by professionals. A higher timeframe, such as for a month, is used to spot the long-term trend and check if there is an uptrend or an intermediate correction, while a medium timeframe, such as for a week, is used to take advantage of the intermediate correction for trading, or participate in the pullback for entry to participate in the trend. The lower timeframe is used to enter or exit the trade. 

A ratio of 1:4 or 1:6 is generally followed. If the higher timeframe is monthly, the medium timeframe would be weekly, and the actionable timeframe, daily or even hourly. For fine-tuning, one can go further down into minutes. If a trader uses a 15-minute chart for his trade set-up, he can check the broad trend hourly (60-minute) and enter in a shorter timeframe. Choosing a timeframe is purely based on the trading style.  

Trading multi-timeframe opportunities 

Trading a multi-timeframe begins with identifying the broad trend. If the broad trend is bullish, one can wait for an intermediate correction to enter a long trade and vice-versa. However, if the intermediate correction is extended, one can trade the intermediate trend itself before a break-out of the intermediate correction takes place. It is important to know about drawing trend-lines and candlestick patterns, as it will help in identifying the beginning and end of a pullback for entry and exit purposes. 

In our example, we shall be using weekly and daily timeframes for analysis. In the below chart of Titan, we can see a rising wedge formation in the weekly timeframe. While both the lines are upward sloping the upper trend-line has a much lower slope than the lower slope. Wedges are a distribution pattern that indicate that the bulls are exhausted, as the lines converge and eventually the support is breached, as the trend-lines converge and prices fall. 

The lower trend-line has four touch points, while the upper trend-line has three touch points, with a throw-over in the third touch point. The throw-over indicates that the upper trend-line is going to be broken, but selling pressure at higher levels ensues. In the chart below, the long bearish candle is a dark cloud cover at the top, indicating a bearish signal confirming the selling pressure. Also, the last candle at the lower trend-line is a harami pattern and a bearish pin bar, indicating a high probable breach of the lower trend-line. The icing on the cake is the MACD showing negative divergence, where the price is making a higher high but the MACD is making a lower high. This is a high probable reversal setup. 

Let us zoom in to the daily chart of Titan and examine the price behaviour for action. In the daily chart of Titan below, after touching the upper trend-line, prices have faced resistance and are unable to sustain a further upmove. A hanging man candle pattern also appears at the top. The second candle is a bearish Marubozu supporting the slide. The prices consolidate near the lower trend-line for several days, indicating a distribution. Finally, the prices gap down the trend-line and slide sharply. One can hardly fail to observe the negative divergence in daily MACD, confirming the imminent fall. 

If we zoom in further into the hourly chart, a gap down at the opening is seen. The price has slid during the day to close lower, subsequently seeing a constant slide.  

Conclusion 

Multi-timeframe is a combination of many things that add up to form an opinion. It helps arrive at a broader view from a larger timeframe. At a lower timeframe, a trade set-up can be identified, and at a further lower timeframe, entry-exit can be planned. This helps the trader know in advance what and how he is going to trade. Better risk management is possible as stop losses can be fine-tuned in the lower timeframe. Before embarking on multi-timeframe analysis, it is important to get familiarised with candlestick patterns, trend-line indicators and price action. Practice is essential in multi-timeframe analysis.