Choose your timeframe combination

27th September 2013, 06:13 PM

Multiple timeframe analysis is paramount when trading any strategy, supply and
demand is not an exception. In order to make a top down analysis we need to choose a
sequence of timeframes which we will always use in the same order. The smaller the
number of timeframes used in your sequence, the lower the number of trade setups
you will find which means you will have a distorted view of what the bigger picture
trend is doing.

We can use two or three timeframes in our combination for our sequence. A minimum
of three timeframes is required if trading lower timeframes. By choosing at least three
timeframes you will be able to apply the realignment and sequence rules with more
accuracy, you can add one or two timeframes more if you wish as long as these
timeframes don't change very often. There are multiple sequences and trends playing
out at any moment in time, the more timeframes you add to your sequence, the bigger
the confusion and trading paralysis you might suffer.

There is one fact you just can't change no matter how hard you try --> The lower
the timeframe the more noise you will find, the more difficult to trade it will become
and the more experienced trader you will need to be. Most traders think that the lower
the timeframe the better they will do and the more money they will earn. I believe you
already know what is generally (not always) the result of that thinking process. It's
like saying, hey I am learning how to drive, can I borrow your Ferrari? Instead of
using a slow, small car with less horse power.

Setting and forgetting your trades is a way of life, it's not just trading that should have
driven you here, it's not about being in front of the computer 6-8 hours a day. One
hour a day or every two days should be enough. Deciding how many hours you want
to spend in front of your trading platform is one of the most important decisions that
you will have to take in your trading career. You decide the purpose for your trading
and your goals. Trade for a living, or living to trade? Which one applies to you?

The type of trader you are is directly related to the timeframe sequence which
you will choose. It will determine the type of trades that you take, how long you will
hold them and how you manage them. Once you have decided which type of trader
you are, which style fits your personality, you should accept and be happy to
ignore/miss trades that do not match your sequence and take only those that your
chosen sequence allows you to take.
Watch the short video below on how to take a trading decision on Daily
timeframes. This short video shows you how quick it can be done and why I trade
these imbalances. It's a personal decision that fits my goals and life style. A more
detail post explaining this can be read here

WATCH VIDEO:

HOW TO CHOOSE YOUR TIME FRAME COMBINATION AND YOUR

SEQUENCE

THE RULE OF 5

A simple way of choosing your personal three time frames can be to follow the rule of
5. The rule of 5 simply means that your three time frames should be separated
“roughly” by the time factor of 5.

As you remember my stating in a previous lesson, “Price is fractal” and Fractal means
that there are structures within structures, the same patterns repeat over and over on
all timeframes when we drill down a candle on any timeframe.

The best combinations for trading multiple timeframe analysis are those that use
a common multiplier, in our case the factor 5. Any multiplier or scale can be used
but we need to keep it consistent over the timeframes we select for our sequence.
As price is Fractal a candle can be multiplied or divided to obtain either a Lower
Time Frame or Higher Time Frame Candle. [From a mathematical point of view]
• 6 x H4 Candles = 1 Daily Candle
• 5 x Daily Candles = 1 Weekly Candle
• 4 x Weekly Candles = 1 Monthly Candle
When it comes to trading where the big boys conduct their business you will realise
that the H4, Daily, Weekly and Monthly time frames are the “Ace of Spades”. Why
will be explained further below.

In the above list, we can see a common multiplier factor; the average multiplier is
five. A Monthly candle has four weekly candles and a weekly candle is made of five
daily candles and so on. If we sum up 6 + 5 + 4 and divided by 3 (number of
timeframes used in the sequence) we will get 5 as the multiplier.

If we used a timeframe with a multiplier much bigger or smaller than 5, we would not
be able to take advantage of the "fractality" of price. “The sequence” – a concept we
will discuss in one of the next lessons would be broken and the realignment rules
(another concept for later) could not be applied.

By using similar multipliers we make sure that the differences between the chosen
timeframes are minimal and the "fractality" of candles stays intact. This is why using
timeframe combinations such as WK, D1 and M30 make no sense.

Which time frames to use?

This is one of the biggest decisions in your trading career. You need to make this
decisions by yourself and should be driven by your personal circumstances.

A long-term trader who would like to be in the same trade for months will find little
use to select a 15 Min, 1 hourly and 4 hourly time frame sequence. At the same time
an intraday trader who holds positions rarely longer than a day would find little
advantage using daily, weekly and monthly combinations. This is not to say that the
long-term trader would not benefit from keeping an eye on the H4 chart or the
short-term trader from keeping a daily chart in the selection.

To determine what kind of trader you want to be in the near to mid-term future you
need to assess your time limitations, your personality and your mental and
psychological stamina.
Ask yourself the following questions:
• Can I trade smaller time frames due to work or family commitments? Is it
possible and realistic to spend at least several hours per day focused and
uninterrupted during the London open until lunch break of the New York
sessions 3-4 days per week? Do not even think about intraday trading outside
these time windows. Although the Forex market is a 24 hour market the real
and significant movement is during these sessions. If you cannot fulfil the
above criteria then an “intra-swing combination” is not the right option for you
• What is my personality? Do I need action day in and day out or do I want to
enjoy life away from the charts and only look at them once per day or once
every several hours? If you are like me and want to enjoy life then a Position or
Swing Trading combo is better for you.
• Am I mentally and psychological stable enough to trade on smaller time
frames making decisions and a correct analysis in a very short period of
time? If not then again “intra-swing combinations will not be the correct option
for you.
There are more questions that you need to ask yourself, which I cannot answer for you
as I do not know you.

The fallacy of shorter time frames

My experience tells me that after you have read the above bullet points you most
probably think, “He is making valid points” but I still want to be trading intraday. I
am sure I will find a way to trade while my boss is not checking up on me. I have the
right personality and of course I am not like all the others. I am mentally and
psychological stable : - )"

Keep the following aspects in mind.

Problem 1 – the more I trade the more money I make (misconception)

The more I trade the more money I make. While it is true that trading on shorter time
frames creates a lot more opportunities for trade execution you need to keep in mind
that your profit potential per trade is also smaller. How come?
• Do not forget that a smaller time frame move means also less pips/points. You
can simply identify this by measuring the pips from one extreme of a swing to
another (which could be a DBR or RBD) and compare it with higher time
frame swings
 • With every trade you make your broker is charging you a commission, because
they want your money. A broker is not a “retail trader’s charity”
• The lower the time frame the more important the spread becomes. You do not
believe me? Do the following. In point 1 I have asked you to measure the pips
from one extreme to the other extreme. On a 5 minute time frame on a major
pair a swing is usually between 20 and 30 pips. Will you be able to hit the
extreme every time? No! If you are really good you can get maybe 60% of the
entire move. Let’s say your swing is 30 Pips x 0.6 = 18 pips. Now take the
spread away your broker charges you and your profits melt like butter in the
sun. Now imagine you have to achieve such swings every day several hours per
day. Add now the inevitable loosing trades and your dreams of driving a Ferrari
in 2 months is history
Learning: Especially as a beginner you should stay away from smaller time frames.
Ideally you should never go below a 4 hour entry chart. In the beginning you should
stick to the daily time frame or higher as this gives you enough time to analyse, to
reflect and to focus on your trades.

Problem 2 – Market Noise

The lower one goes into a time frame unfortunately the less reliable supply and
demand zone becomes. Why is this? Because banks and institutions do not trade on
lower time frames. It is the banks and institutions that are the dinosaurs and these
dinosaurs leave footprints. These foot prints are visible on all timeframes but specially
on the daily, weekly and monthly charts as our supply and demand zones. Imbalances
exist on all timeframes, however the lower the time frame you go the more you will
lose focus on what the bigger picture is telling you.

Imagine you identify a 5 minutes supply/demand zone (20 pips/ticks wide) and an
institution fires off an order of 20000 currency contracts in a range between 1.5020
and 1.5060. You did not really think a Goldman Sachs accumulates a position in a
price range of 20 pips did you? It can’t because their positions are so big that they
cannot execute their orders in such a small range in the first place. For every buyer
there needs to be a seller. Imagine what would happen if a bank wanted to buy the
equivalent of 2 billion Euros in the market all in one go? Price would not execute
there as it cannot find so many sellers at such a small price range. Price movement on
lower time frames are generated mostly by retail traders and smaller hedge funds. As
we all know – the majority of retail traders and small hedge funds are the uninformed
market participants, otherwise they would not be retail traders or small hedge funds.

Problem 3 – Our upbringing

From early on we were told that the more we work the more money we can make.
This is true in most endeavours but not in trading.

A smart trader once said. “We are not traders – we are waiters”. We have to wait
patiently and only take action on high probability areas. Trading is not gambling,
trading is a business and just as in other areas of business, profitable opportunities do
not come along every 5 minutes.

Again, I can only warn you for going down the intraday route too early in your career.
Ultimately it is your choice but don’t complain afterwards that you have not been
warned.

Find below some configurations I feel are best depending on your choice you
hopefully have made by now.

POSITION TRADING CONFIGURATIONS

We will be using daily imbalances as your entry timeframe, Refer to the Sequence
lesson for more information about it, it uses a very mechanical top down analysis
approach to locate our entries. There are times when a swing entry on H4 can become
a long term trade, if that is the case we should manage the trade by using Daily and
Weekly imbalances, this will be explained in a future lesson.

If you can’t trade successfully on the daily chart timeframe, you won’t be able to trade
successfully on any lower timeframe combination either. The daily chart is simply the
best timeframe to trade, and I don’t believe that to be a subjective view point either.
Generally speaking, the lower the timeframe you choose, the lesser chance any given
price action pattern has of working out. This is due to market noise that simply mean
nothing. Within all this noise there inevitably arises potential setups that may look
good to the untrained eye.

The daily chart time frame has a much better chance of being meaningful, simply
because there’s less random market fluctuations. The daily chart shows the most
relevant view of a market, what is happening and what might happen next. As you go
down to lower timeframes, this view becomes hazier and noisy.

HOW MANY TRADES CAN I EXPECT?

This is the million dollar question. How many trades can the strategy produce every
day/week/month/year? Well think of the strategy as a set of rules that will mostly
prevent you from trading low odds trade setups. The strategy will also provide with
great setups but think of it as a set of tools/rules, a way of reading market price action,
that will prevent you from taking unnecessary losses.

You won't just be learning a trading strategy in this classroom, you will also learn a
way to read price action and what you expect price to do under X and Y scenarios.
This will also help you develop your own nuances that might help you create personal
setups based on the core rules and your own nuances. You will be building a
wire-frame on which you will start adding new pieces.

The number of trades depends on a bunch of factors, mostly on the sequence of

timeframes used in your trading and the number of assets that you trade. The more
assets the more opportunities. It also depends on what type of trader you are
(conservative, aggressive), trading only trending setups or also trading consolidation
and counter-trend.

Factors affecting the number of trades:

• Timeframe sequence chosen. The bigger the timeframe sequence, the lesser
the number of trades per day/month/week. The smaller the timeframe sequence,
the larger the number of trades.
• Number of assets in your watchlist. Having a small selection of assets (cross
pairs in Forex, or Stocks) will yield a smaller number of trades. This number
will be proportional to the how large your watchlist is. The larger the watchlist
the larger the number of trades
• Type of trader and scenarios. Deciding what type of trader and scenarios you
want to trade will have a big impact on the number of trade setups. The more
scenarios you trade, the larger the number of setups
o Trend trading
o Counter-trend trading
o Consolidation/ranging scenarios
You must put names and numbers to these variables in order to build your own
trading plan because the number of trades will mostly depend on them. If the number
of assets that you trade is reduced and you only trade a few Forex cross pairs then you
will limiting your entries to just a few or very few, forcing you to look at the lower
timeframes or very low timeframes. You should put your money at risk at those assets
that are doing what they are expected as per the rules, it could be a stock, it could be
Gold or the futures market, you should not care. Trade the valid setups.
POSITION TRADING CONFIGURATION:
• BIG PICTURE timeframe: Monthly chart is our supply/demand SD range
and bigger picture direction
• INTERMEDIATE DIRECTION: Weekly chart is our intermediate direction
and part of the top down sequence analysis
• EXECUTION and trade management timeframe: D1 chart
o This is the chart where we should draw and pick our levels up and where
we will set our limit orders
o This is also the chart where we will manage our trades, we'll use
technical SL to move our SL above/below new D1 SD areas. This is
explained on another lesson
• FINE TUNING timeframe (optional): H4 chart
LONG TERM CONFIGURATION

We will be using monthly and weekly imbalances as our entry timeframes. Refer to
the Sequence lesson for more information about the timeframes to use and why, the
sequence uses a very mechanical top down analysis approach to locate our
imbalances.

LONG TERM TRADING CONFIGURATION:

• BIG PICTURE timeframe: 3M will be our supply/demand SD ranges and
bigger picture direction
• INTERMEDIATE DIRECTION: Monthly is our intermediate direction and
part of the top down sequence analysis. Monthly can also be used as our entry
timeframe
• EXECUTION and trade management timeframe: W chart
SWING TRADING CONFIGURATIONS, THE SEQUENCE:
Timeframe combination for medium-term setups. This setup uses the Sequence, a
concept added in a later lesson. Refer to the Sequence lesson for more information
about that, it uses a very mechanical top down analysis approach to locate high
probability trade setups.

SWING TRADING COMBO:

Timeframe combination for medium-term setups
 • BIG PICTURE timeframe: Weekly chart is our supply/demand SD range
and bigger picture direction
• INTERMEDIATE DIRECTION: Daily chart is our main direction. We need
at least D1 direction for our H4 swing entry
• EXECUTION and trade management timeframe: H4 chart
o This is the chart where we should draw and pick our levels up, where we
will set our limit orders. If the H4 level is too wide we can drill it down
by using either a fixed number of pips (for instance 40 pips on EURUSD
for H4 charts) or a third timeframe to fine tune our entry. We will not
zoom in and look for levels on lower timeframes above or below that
area because it's the H4 area we should be interested in. If the level itself
is on H4 then we have to base our decisions on this timeframe, the one
we have defined originally as our execution timeframe. Otherwise we'll
end up chasing the trade and finding what we want to see on the charts
not what the market has to offer us at that particular moment
o The execution chart will also be the chart where we will manage our
trades. We'll technically adjust the stop loss by moving it above/below
new H4 SD areas accordingly. This is explained in a further lesson.
INTRA-SWING TRADING CONFIGURATION:
If we choose to use H1 levels as our entry timeframe then we will switch to this
timeframe combination:
• BIG PICTURE timeframe: Daily chart is our supply/demand SD range and
bigger picture direction
• INTERMEDIATE DIRECTION: H4 is our intermediate direction and part of
the top down sequence analysis
• EXECUTION timeframe: H1 chart
o This is the chart where we should draw and pick our levels up and where
we will set our limit orders
o This is also the chart where we will manage our trades, we'll use
technical SL to move our SL above/below new H1 SD
• FINE TUNING timeframe (optional): M15

NOTE: H1 timeframe can also be used for swing trading as long as you use this
chart to drill down your entry at a higher timeframe supply demand area. It all
depends on your style of trading. H4 levels will give you more time
VERY IMPORTANT: CONCENTRATE ON ONE SINGLE TIMEFRAME
COMBINATION
• Choose only one combination. Stick to your decision and don't change your
mind.
• Hide the timeframe buttons you are not going to use. Enable only those you
have chosen for your sequence. You will see that in short you will start
improving because your mind will not have to take into account so many
timeframes and information.
JUST DO IT! Don't find excuses not to do it, hide those timeframes you are not
going to use and concentrate only on those that you will use, that simple. The
Sequence is a VERY powerful combination, start with that one, HIDE all the other
timeframes and that should help you tremendously.

You must follow very strict rules or you will enter an unbreakable loop. A huge
percentage of your success lies in controlling your emotions and managing your exits
correctly. Pulling the trigger is not an issue.

The key to becoming consistent is by being consistent. It's a loop that only YOU can
break