Using Multi-timeframe analysis to make better trading decisions
Trading on multiple timeframes can significantly improve your risk-reward ratio, regardless of what TA technique, you are using. Let’s look at the recent example (SPY ETF)
Third week of February started with a strong sell-off (Monday-Tuesday 13th). Price retraced >50% of the previous move, signaling potential trend reversal. At this point market Bears started scouting for daily low high to enter short trade. They received signal on Friday 16th when price broke previous day low.
A short trader, who trades only daily chart, would enter this trade at Friday close with stop-loss slightly above daily high and 1st profit target near Tuesday low. This setup provides a decent risk-reward ration >2. There is also a chance that previous low will be broken and price will fall even further, adding to profit. So taking this trade makes a lot of sense. On the main graph to this post you can see how it developed.
Price has not reached our profit target, reversed and made new high. Trade got stopped-out. Even if trader was using trailing stop (stop moved slightly above each new day high) this would not have saved him from huge overnight price jump
Could have the trader done better? Yes, if he had zoomed into lower timeframe and monitored price action there.
Here is what we can see on the 15m chart. (boxes show hourly candles, color coding matches hourly wave direction, you can read about how waves are constructed here www.tradingview.com/...wepJ-HT-Waves-Light/)
Bearish reversal pattern shaped on Thursday- Friday. It is not an ideal triple top but there was a clear weakening of upthrust. Also, on Friday morning price broke previous day low, a sign of an increased bearish strength.
Basically, at 21.30 (UTC+1) short trader already had enough evidence to enter trade. He could have done it w/o waiting for day closure. This would have already been a better entrance than in the first scenario.
After entering the trade, trader could start monitoring for continuation. Tuesday was clearly bearish but on Wednesday there were multiple signs of shift of control. Firstly, price was able to set hourly higher low. Secondly, bearish wave was progressing very slowly. Finally, there was a 15 m equilibrium (end of Wednesday RTH) that resolved convincingly bullish. At this point a reasonable trader should have closed his trade without hesitation.
This would not be a great trade still, but it will be a profitable one, with risk-reward 1.7. It is nearly impossible to achieve same results looking just on the daily chart.
Disclaimer
I don't give trading or investing advices, just sharing my thoughts
Third week of February started with a strong sell-off (Monday-Tuesday 13th). Price retraced >50% of the previous move, signaling potential trend reversal. At this point market Bears started scouting for daily low high to enter short trade. They received signal on Friday 16th when price broke previous day low.
Price has not reached our profit target, reversed and made new high. Trade got stopped-out. Even if trader was using trailing stop (stop moved slightly above each new day high) this would not have saved him from huge overnight price jump
Could have the trader done better? Yes, if he had zoomed into lower timeframe and monitored price action there.
Here is what we can see on the 15m chart. (boxes show hourly candles, color coding matches hourly wave direction, you can read about how waves are constructed here www.tradingview.com/...wepJ-HT-Waves-Light/)
Basically, at 21.30 (UTC+1) short trader already had enough evidence to enter trade. He could have done it w/o waiting for day closure. This would have already been a better entrance than in the first scenario.
After entering the trade, trader could start monitoring for continuation. Tuesday was clearly bearish but on Wednesday there were multiple signs of shift of control. Firstly, price was able to set hourly higher low. Secondly, bearish wave was progressing very slowly. Finally, there was a 15 m equilibrium (end of Wednesday RTH) that resolved convincingly bullish. At this point a reasonable trader should have closed his trade without hesitation.
Disclaimer
I don't give trading or investing advices, just sharing my thoughts