How to Use Multiple
Any modern charting package will have several time frames for you to pick from. A time frame is an interval that creates a new price bar. For example, a 5-minute bar means a new candlestick/bar is made every 5 minutes, representing 5 minutes of market data.
Generally, the time frame you use for trading defines a few things: the amount you’re risking on trade and the amount of time you’ll be in a trade.
A setup on a 1-minute chart can take just a few minutes to play out: you can be in and out of the market in that time. The same setup on a weekly chart can take months to work out.
It’s prudent to ensure that any trade you take has a reward/risk ratio skewed in favour of reward. We want our average winning trades to be much bigger than our average losing trade.
One way to put the odds further in our favour is to confirm trading setups and price action on multiple time frames. If you see a setup forming on a 1-minute chart, but the hourly chart looks like it’s playing against that setup, you’re not playing the odds.
Getting a Different View
Sometimes you stare at a one-time frame so long that you forget what the chart might look like in another time frame. You might stare at a five-minute chart all morning and get so locked into it that you might not see a reversal happening in the longer time frame.
What looks like an uptrend on an intraday chart may be a lower high being formed on a daily chart. Sometimes looking at multiple time frames will change your bias completely. You may be looking for entries to get long until looking at the daily chart prompts you to shift to looking for short setups.
Letting Trades Run
For many, trading returns follow the Pareto Principle: roughly 80% of your returns come from 20% of your trades. Their trading account will play small ball for most of the year, taking small wins and losses until those big trades come, which is the difference in your annual returns. You can allow your 20% to be losing trades or winning trades. It’s mostly a matter of money management.
Using multiple time frames is a great way to expose yourself to potential home run trades. It’s one thing to use hourly and daily charts to confirm a setup on a 5-minute chart, but if that’s all you’re using them for, you’re missing out.
You see, sometimes the setup you see on the one or 5-minute chart plays out on a longer time frame. A breakout on a 5-minute chart might turn into one on an hourly chart, which might turn into a daily chart breakout. The longer the time frame, the more significant your gains will be. After all, we know a daily chart breakout is more effective than one on an intraday chart.
Identifying Vital Levels
Perhaps you’re trading on a 5-minute chart and identify a support level that has been defended several times. Going out to more extended time frames shows how significant this level is or if it’s just a short-term level.
Repeated buying and selling at specific levels from support and resistance levels. Most of the time, it’s institutions accumulating or liquidating a position. The difference between a support level on a 5-minute chart and one on a weekly chart is paramount.
A level that only exists on a 5-minute chart could be an ETF or mutual fund simply rebalancing. Once that’s done, the level is also done. On the other hand, a daily or weekly chart level has been defended for weeks, months, or years. Big fish have been accumulating or liquidating around that price for a long time, making it more likely for them to continue doing so.