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Technical Trading Strategies. Multiple Time Frame Analysis
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MULTIPLY TIME FRAME ANALYSIS

In order to trade successfully on an intraday basis, it is important to be se­lective. Trend trading is one of the most popular strategies employed by global macro hedge funds. Although there are many traders who prefer to range trade, the big profit potentials tend to be in trades that capture and participate in big market movements. It was once said by Mark Boucher, a hedge fund manager of Midas Trust Fund and a former number one money manager as ranked by Nelson Marketplace's World's Host Money Man­agers, that 70 percent of a market's moves occurs 20 percent of the time. This makes multiple time frame analysis particularly important because no trader wants to lose sight of the overall big picture. A great comparison is taking a road I rip from Chicago to Florida . There are certainly going to be a lot of left and right turns during the road trip, but the driver needs to be aware throughout the whole trip that he or she is headed south. In trad­ing, looking for opportunities to buy in an uptrend or sell in a downtrend tends to be much more profitable than trying to pick tops and bottoms.

The most common form of multiple time frame analysis is to use daily charts to identify the overall trend and then to use the hourly charts to de­termine specific entry levels.

Figure 8.1 AUD/USD Multiple Time Frame Daily Chart

The AUD/USD chart in Figure 8.1 is a daily chart of the Australian dol­lar against the U.S. dollar. As you can see, the Australian dollar has been trending higher since January 2002. Range or contrarian traders who con­tinually looked to pick tops would have been faced with at least three years of unprofitable and difficult trading, particularly when the currency pair was hitting record highs in late 2003 into early 2004. This area would have certainly attracted many traders looking to pick a top or to fade the trend. Despite a dip in late 2004 the AUD/USD has remained strong going into 2005, which would have made it very difficult for medium-term range players to trade.

Figure 8.2 AUD/USD Multiple Time Frame Hourly Chart

Instead, the more effective trading strategy is to actually take a posi­tion in the direction of the trend. In the AUD/USD example, this would have involved looking for opportunities to buy on dips. Figure 8.2 is an hourly chart with Fibonacci retracements drawn from the February 2004 all-time high and the low of June 17, 2004 . Rather than looking for oppor­tunities to sell, we use the 76 percent Fibonacci retracement level as key support zones to go long the Australian dollar. The horizontal line in Fig­ure 8.2 represents the Fibonacci retracement level. What we did therefore was use the daily charts to get a gauge of the overall trend and then used the hourly charts to pinpoint entry levels.

Let's take a look at another example, this one of the British pound. Figure 8.3 is the daily chart of the GBP/USD for January 2002 to May 2005. Like traders of the Australian dollar, traders trying to pick tops in the GBP/USD would have also faced at least three years of difficult trading, particularly when the GBP/USD was making 10-year highs in January 2004. This level would have certainly attracted many skeptics looking to pick tops. To the frustration of those who did, the GBP/USD rallied up to 10 percent beyond its 10-year highs post January, which means that those top picket would have incurred significant losses.

Figure 8.3 GBP/USD Multiple Time Frame Daily Chart

Figure 8.4 GBP/USD Multiple Time Frame Hourly Chart

Taking a look al the hourly chart for the GBP/USD, we want to look for opportunities to buy on dips rather than sell on rallies. Figure 8.4 shows two Fibonacci retracement levels drawn from the September 2004 and December 2004 bull wave. Those levels held pretty well on retracements between four-tenths and four-fourteenths while the 23.6 percent Fibonacci level of­fered an opportunity for breakout trading rather than a significant resistance level. In that particular scenario, keeping in mind the bigger picture would have shielded traders from trying to engage in reversal plays at those levels.

Multiple time frame analysis can also be employed on a shorter-term basis. Let us take a look at an example using CHF/JPY. First we start with our hourly chart of CHF/JPY, which is shown in Figure 8.5. Using Fi­bonacci retracements, we see on our hourly charts that prices have failed at the 38.2 percent retracement of the December 30, 2004 , to February 9, 2005 , bear wave numerous timers. This indicates that the pair is contained within a weeklong downtrend below those levels. Therefore, we want to use our 15-minute charts to look for entry levels to participate in the over­all downtrend. However, in order to increase the success of this trade, we want to make sure that CHF/JPY is also in a downtrend on a daily basis.

Figure 8.5 CHF/JPY Multiple Time Frame Hourly Chart

Taking a look at Figure 8.6, we see that CHF/JPY is indeed trading be­low the 200-day simple moving average with the 20-day SMA crossing below the 100-day SMA. This confirms the bearish momentum in the currency pair. So as a day trader, we move on to the 15-minute chart to pinpoint entry levels. Figure 8.7 is the 15-minute chart; the horizontal line is the 38.2 percent Fibonacci retracement of the earlier downtrend. We see that CHF/JPY broke above the horizontal line on May 11, 2005 ; how­ever, rather than buying into a potential breakout trade, the bearish big picture reflected on the hourly and daily charts suggests a contrarian trade at this point. In fact, there were two instances shown in Figure 8.7 where the currency pair broke above the Fibonacci level only to then trade significantly lower. Disciplined day traders would use those oppor­tunities to fade the breakout.

Figure 8.6 CHF/JPY Multiple Time Frame Daily Chart

Figure 8.7 CHF/JPY Multiple Time Frame 15-Minute Chart

The importance of multiple time frame analysis cannot be overesti­mated. Thinking about the big picture first will keep traders out of numer­ous dangerous trades. The majority of new traders in the market are range traders for the simple fact that buying at the low and selling at the high is an easy concept to grasp. Of course, this strategy does work, but traders also need to be mindful of the trading environment that they are participating in. Looking back to Chapter 7, traders should try to range trade only when the conditions for a range-bound market are met. The most important condition (but certainly not the only one) is to look for ADX to be less than 25 and ideally trending downward.

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