Trading Pal Blog

The fractal character of a stock chart is unbelievable. Within each rise and fall there are more of the same at a smaller scale!

According to how much data they are looking at two traders could claim that the market is rising or falling and they would be both right depending on their time span.

Is there a way to reconcile this and have just one opinion? The answer is yes. You can choose to trade only when two timeframes are in agreement. Let's say the long term is trending up and the short term is also rising - you should be on a long trade. Let's say the long term is going down and the short term is falling - you should be on a short trade.

The bottom line is that you use two timeframes to correlate each other. If they disagree and you are out of the market - you stay out. If they disagree and you are in the market - you stay in the market unless your stop is being hit.

A commodity price can tell you one thing on a daily chart but quite a different message on a weekly chart. What about a monthly chart? There you have it - 3 timeframes now!

Someone might say: "But you are leaving too much money on the table with that system!" In retrospect everybody can pick the highs and the lows of the market. It's when your nose is stuck on the right edge of the chart that you are not so proud anymore. That's where the doubting and angst occur.

A multi-timeframe approach can help you keep your sanity. Indeed the short term will give you a faster response (larger gains or shorter losses) but it will give you also a lot of false triggers. Only when confirmed with the longer trend will you have more chances of being correct.

At the end of the day it is a numbers game. You want to have more gains than losses and you cannot avoid losses altogether. But you can use this method to ensure you don't destroy your good trades. If you keep a log of your trades and work out your averages you will be able to become reliable.

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