Category: Multiple Time Frames

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Entry Triggers on the Lower Time Frame

Entry Triggers on the Lower Time Frame

Above, is a good framework of what to look for on the entry/trigger time frame (short trade). If MACD crosses down through Signal line on the break of the uptrend line (red trendline), step 1 in a change of trend; then on step 2, it should setup some version of a pinch play which is where the 1st entry arrow is pointing. 2nd entry arrow is the MACD crossing down through the Signal line. Last arrow is the break of the 40 MA line. Entry 2 and 3, at times, will happen simultaneously so it is important to understand the concepts below.

Keep in mind, we do not know 2 is 2 until it turns down. Do not pick a top. Either wait for MACD signal or go down to a lower time frame for the trigger. In addition, the target area is typically based on the swing tops and bottoms on the Trend time frame (Trade-able time frame) which is one time frame above the trigger time frame. I always prefer looking for 3:1 reward to risk or better on my trade setups. Using this approach is a good way to filter out bad entries as discussed below.

When a trigger signal develops, it is important to recognize how many bars down from the peak the stock has moved. Entry on bar 1-2 are best (YES entry example is day 2). Entries after 3-5 bars down (??? entry example) have greater risk to the stop and have greater risk of moving against you first before eventually moving in your favor. This can be very uncomfortable psychologically.

Rules for Multiple Time Frames – Rule 2

Rules for Multiple Time Frames – Rule 2

Rule 2 – The higher time frames overrule the lower time frames.

Rule 2 means that if we have a buy signal on the daily chart and a sell signal on the weekly chart at the same time, the weekly chart wins.  Exxon Mobil Corp. (XOM) below has a bullish crossover on the daily chart at the same time there is a bearish crossover on the weekly chart.  We do not want to buy this daily signal when it is essentially giving the same signal in the opposite direction on the weekly chart.

Exxon Mobil Corp. (XOM) daily chart with 18 MA crossing above the 40 MA line.
Exxon Mobil Corp. (XOM) weekly chart with 18 MA crossing down below the 40 MA line.

In fact, I will show you the tactics to take advantage of this scenario later in this manual.  For now, just understand that we never take a setup on a lower time frame (daily) if the higher time frame (weekly) is giving an opposing signal at the same time.

Rules for Multiple Time Frames – Rule 1

Rules for Multiple Time Frames – Rule 1

Rule 1 – Every time frame has its own structure as well as support and resistance levels.

A simple way to see price structure is by using the filtered wave theory described earlier.  The waves for each time frame will be different since each wave is trying to closely mimic the key turning points for the specific time frame.  The turning points for these waves are considered important support/resistance levels since they were strong enough to cause a reversal. 

The above chart is the daily of The Hershey Company (HSY) with the wave structure and support and resistance lines.  The red line connects the highs and lows of each wave in the price structure which helps to define the trend.  This shows the price peaked in Feb 2014 at $108.69 and made a lower high followed by a lower low bottoming at $87.88 at the end of July 2014.  Since that time the price waves have made a higher low and a higher high.  The reversal point for each wave is considered support/resistance on that time frame.  As you can see, in this time frame, there are several horizontal lines drawn depicting potential support and resistance levels.

This chart is the weekly of The Hershey Company (HSY) with its wave structure and support/resistance lines.  Notice how much less noise there is on the weekly time frame during 2014.  The daily chart had several waves during 2014 but the weekly only had one top and one bottom.  As a result, we can see that the price structure is unique to each time frame and key support and resistance lines are different as well.  It is important to recognize that key turning points will display differently in each time frame.  In this case, the weekly chart shows the two most important reversal levels of 2014.  This should be factored into any decision when looking the daily chart.  We always want to look up a time frame to see key levels of support and resistance.  In addition, we want to identify the trend based on the wave structure of the higher time frame.  In general, it is best to trade when both time frames are shifting their trend simultaneously, but this happens less frequently.  Instead, we can use key support and resistance lines on the higher time frame to help decide whether the trade has the proper risk/reward characteristics on the lower time.

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