The Two Time-Frame Approach to Trade Selection

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    The Best Binary Options Broker 2020!
    Perfect For Beginners!
    Free Trading Education, Free Demo Account!
    Get Your Sing-Up Bonus Now!

  • Binomo
    Binomo

    Good Broker. Only For Experienced Traders!

The Two Time-Frame Approach to Trade Selection

In former articles I have talked a lot about utilizing multiple time frames to make trading decisions, as well as discussing strategies for making trades. These can seem like independent topics though, and sometimes traders aren’t sure how to combine looking at multiple time frames, and then deciding when to pull the trigger on a trade. Looking at a recent trade example, I’ll show you how I use a longer-term chart to find potential traders, and then use a shorter-term chart for my trade set-up and entry.

The Longer-Time Frame

I typically have about 10 to 15 charts open showing different forex pairs. Each night I reset all my charts to a daily time frame. I quickly glance through each one and look to see which are trending strongly overall, or recently had a very sharp move over the last week. At this stage I am just looking to narrow this group of pairs down to about 5 pairs or less. I am only looking for pairs where it looks highly probable they will continue in their current direction. I also look for high probability reversal points, but usually this is still in alignment with a long-term trend.

Take the USD/CAD for example. Figure 1 shows the daily chart, where the pair had been trending higher. A triangle forms, and the price breaks higher but then quickly fails and strong selling ensues. The strong selling followed by a pause created a pennant formation, which is a continuation pattern (see Rip, Trip, Rip Trade Setup). Given all the evidence, there was a high likelihood the price would continue lower, at least in the short-term.

Figure 1. USDCAD Daily Chart

Now in hindsight we can see the price did in fact head lower. But as soon as that small consolidation formed, it was time to drop to an hourly chart and look for an entry.

Figure 2 shows the hourly chart, zoomed in on the small consolidation. Remember, based on the daily chart our expectation is that the price will continue to move lower, therefore we are looking for an opportunity to capitalize on that by looking at the hourly chart.

Figure 2. USDCAD Hourly Chart

The chart shows two potential entry points on the hourly chart. Once we are able to draw a support and resistance line we can see the price is moving within another triangle. Therefore, we can take a trade near the top of the triangle since we are expecting the price to move lower anyway. This is a more advanced trade because we don’t know how long the triangle may last, which means potentially holding the position through several back and forth price waves.

Another alternative is to wait for a breakout of the triangle. Enter short (buy puts) as soon as the price breaks the triangle to the downside, as this confirms the expectation of a further price decline.

Two Time-Frame Considerations

In this example the daily chart and the hourly chart showed very similar things. The consolidation was visible on both the daily and the hourly chart. That won’t always be the case though. Sometimes you may have very strong daily price bars, indicating the trend is likely to continue in that direction. Dropping down to an hourly or 30-minute chart though you may notice a pattern like the one in Figure 2.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    The Best Binary Options Broker 2020!
    Perfect For Beginners!
    Free Trading Education, Free Demo Account!
    Get Your Sing-Up Bonus Now!

  • Binomo
    Binomo

    Good Broker. Only For Experienced Traders!

The approach is still same. The daily chart provides the direction for the trade, and the shorter timeframe is used to find entry points. If you can’t find a good entry point, don’t take the trade. If you can’t tell what the next likely direction is on the daily chart, don’t trade that pair.

This approach filters out many low-probability traders, but also provides a ton of high quality opportunities.

The time frames used will vary by trader. The example in the figures above was for a swing trade; therefore, I’d expect to be in the trade for a couple days. If day trading an hourly chart may be your longer time frame, and the 5-minute chart your shorter timeframe. The approach is still the same. Look to the hourly chart for a direction to trade in, then the 5-minute chart finds an entry point.

What Are The Best Chart Time Frames To Trade ?

As price action traders, we primarily study charts and price bars, and the price bars in each time frame show us the ‘emotion’ of price for that specific period of time. Whether it’s a 1 hour, 4 hour or daily chart, each price bar on the chart shows the ‘emotion’ and sentiment for the period of time it reflects. For example, on a 1 hour chart we will be able to see the emotion and feeling of the market over the last hour by looking at the last price bar on that chart. That said, a 1 hour chart or a 4 hour chart is going to show us a lot more data, emotion and insight into the market than a 5 minute chart will, would you agree? Would you also agree that the daily chart will show us even more emotion than a 1 hour chart or 4 hour chart?

Today, I’m not just going to tell you what time frame to trade, but I’m going to explain to you why time frames influence the signal you’re trading, stop placement on a trade and the chances of winning and losing a trade. The implications of these points are profound, yet they are often over-looked or ignored by day-traders and scalpers. I am going to show you some evidence of why you need to take this stuff seriously and turn off your low time frame charts once and for all.

The connection between time and trustworthiness of a relationship

Think of the market like a personal relationship between two people; the longer you’ve known someone, the more you know whether or not you can trust them, right? If someone shows you they are a trustworthy person over time then you will probably trust them, however, if a person lies a lot you may actually trust them less as you get to know them…but the point is that until you’ve spent time getting to know a person, you really can’t make any judgments about them, one way or the other.

To give you a more specific example; when you meet someone for the first time, can you really get a good feel for their personality and character in just 5 minutes of talking to them? Or would it take a full day of conversation to get a more accurate feel for their personality and overall mood? The longer you’ve known someone, the better “feel” you have for who they really are.

It’s really very similar in trading; the more you study higher time frame charts like the 4 hour and daily, the better ‘feel’ you develop for the market because you are getting to know more about it and you can see the “bigger picture” a lot easier than you can on smaller time frames. The higher time frames carry more weight because they display more data and show more time than a smaller time frame does. If you are just studying 5 minute or 15 minute charts all the time, you are missing out on the bigger, more significant picture of the market. You’ve probably witnessed this with a long-time friend; you can almost figure out how they will react in any situation…whereas with a complete stranger whom you’ve known for only 5 or 10 minutes, this would almost be impossible; it’s obviously because you’ve had more time to study and learn about your friend.

Let’s look at a chart example of how a 5 minute chart really does not tell you much about the “bigger picture” of a market. Below, we see the 5 minute USDJPY chart, and from this data we really cannot tell if the overall trend is up or down, as the market appears to just be ebbing and flowing very quickly and without much underlying or consistent sentiment:

Next, let’s compare that 5 minute chart above to a daily chart time frame of the same market; USDJPY. From the chart below, even a 6 year old can tell that overall price is moving up; there’s an uptrend underway. Due to the simple fact that you are getting to know more about the market from looking at more data, you are learning some very very important things about it (that the trend is up!) that you cannot tell from just looking at the 5 minute chart.

Another example; if you are traveling and you stay in a town you’ve never been in before for one week, and it rained the whole week, would you tell everyone it “rains a lot in that town”? Or would you agree that you really need to stay in that town for longer and observe its longer-term weather patterns to make such a judgment? Most of us would agree that you need more than one week’s data to judge a town’s overall weather pattern…in other words, a week inside of a year is basically just noise. You can’t make an assumption about a town’s weather pattern unless you look over a longer period of time. Similarly, it’s nearly impossible to read a market’s underlying sentiment without analyzing higher time frame charts. Longer time periods = more data = more evidence / proof.

Why lower time frames are “noise”

Simply comparing a 5 minute chart to a 1 hour chart will show you how many more failed signals there are on lower time frames. The underlying reason as to why lower time frames (I consider anything under a 1 hour chart to be a “low time frame”) have more failed signals than their higher time frame counter parts, is because there will be a lot more meaningless price movement on a 5 minute chart than on a 1 hour. For example, if you were to just look at one price bar on a 1 hour chart, you would not see all the 5 minute incremental movements that made up that 1 hour period….you would instead see the collective picture of all those 5 minute movements.

You simply are not going to get a very strong directional movement out of a 5 minute or 15 minute chart signal, instead, you will get a lot of little meaningless movements. You’ll get a much stronger directional movement out of a 1 hour signal and even more out of a 4 hour signal and yet more out of a daily chart signal. You can expect more movement from a signal the higher up in time frame you go.

In the chart below, we are looking at some recent price action on the 5 minute EURUSD chart. You can see that there were a lot more pin bar signals that probably would have been losing trades than there were winning trades. This demonstrates clearly the fact that whilst there are more signals on lower time frames…more signals does not equal more money, in fact it usually means more losing trades and lost money.

Next, let’s look at the price action that occurred on the 1 hour EURUSD chart around the same time as the 5 minute image above. The first thing you should immediately notice is that there were a lot less losing trades and a lot more winning trades. It’s because there were less false-signals on the 1 hour chart since the 1 hour chart filters out a lot of that “noise” on the 5 minute chart.

Market noise and daily ranges

Markets move in statistical average ranges each day; meaning there’s a certain average range that the market is probably going to move within on any given day. These average ranges will change over time as markets become more or less volatile, but you need to be aware how they affect your trades. The thing about these average ranges that many day traders and scalpers are seemingly unaware of, is that if you’re trading a small time frame and you place a stop loss on that small time frame, the chances that you will get stopped out simply because your stop is within the average statistical range of the higher time frame, are quite high.

If you’re trading a higher time frame, your stop loss is likely to be outside of the average daily range of the market so you are unlikely to get stopped out from the random intra-day market noise that occurs each day. Now, that’s not to say I want you guys to place wider stops, I’m telling you to be aware that stop loss placement is a big factor in your success or failure as a trader and you need to be aware how time frames affect stop loss placement. It’s pretty obvious that if your stop loss is close to the current market price, as it is on lower-time frame trades, it’s more likely to get hit than if you’re trading the higher time frames.

Small time frames demand a lot of attention.

Would you like to check the market every 5 minutes or every 4 hours? The higher the time frame, the less you have to check the markets. If you are like most people, you probably have a full-time job or full-time school, or maybe even both; most people simply don’t have the time to sit at their computers all day trying to trade a 5 minute chart. It’s also a lot more stressful, so it really just makes no sense to try and ‘force’ money out of the market by scalping or day-trading.

I am a huge proponent of ‘letting the trades come to me’. Meaning, I check the markets two or three times a day and look for obvious signals, primarily on the daily and 4 hour charts, and if nothing meets my criteria for a trade setup, I don’t trade…I go do something else instead. I don’t sit there ruminating over the market all day wishing and hoping for a trade like many beginning and struggling traders do. I really do not care if I am in the market or not on any given day, and this is the attitude and trading mindset that you need if you want to trade completely devoid of emotional attachment to the market. My point is simply this; focusing on higher time frames is much better for busy professionals as well as for people who don’t want to have the stress of being glued to their charts all day. It also allows you to employ my crocodile trading method which is a cornerstone of my overall trading theory and strategy.

Small time frames elicit over-trading

“Over-trading”, also known as trading when no obvious signal is present, or taking “stupid” trades, or “gambling”, is something I have discussed quite a bit in other articles, so I won’t get into it too much today. However, I will say that trading low time frames like the 5 minute and 15 minute charts, etc. is one of the biggest reasons why traders trade too frequently. The longer you park your ‘bottom’ in your computer chair watching the 5 minute chart tick up and down, the greater the chance you will rationalize a reason to be in the market.

If you sit there staring at a 5 minute chart all day, the odds of you actually not entering a trade are extremely low. As humans, we struggle with self-control and self-discipline, especially when we put ourselves directly in the realm of temptation, like when trading low time frames. However, one area that we are lucky in as humans, is that we can plan ahead and avoid temptation altogether if we put our minds to it. Just as not buying junk food at the supermarket is the easiest way to avoid eating it…not immersing yourself in low time frame charts is the best way to avoid the temptation to constantly be in the market.

Learn, change, grow…

I obviously cannot speak for everyone in the trading world, but the traders who contact me on a regular basis about struggling in the market and blowing out their accounts, are typically the ones who trade the lower time frames…that has to say something right? From these experiences that I’ve had with other traders over the years, it’s pretty safe to say that ‘social evidence’ suggests that a main cause of failure in the market is trading low time frame charts. However, don’t take my word for it, last year we had over 15,000 emails hit our inbox, and I can comfortably say that the majority of the struggling traders I’ve helped were trying to trade small time frames.

Thus, YOU should do something different…don’t be like the masses of failing traders who are constantly searching for trades on the low time frame charts. Have patience, trade only the higher time frames (1hr, 4hr, daily time frames are my favorites) and see if your trading doesn’t just slowly but steadily improve.

If you want to learn more about higher time frame trading and how it can improve your trading results by filtering out meaningless market ‘noise’ and allowing you to see the ‘bigger picture’ of the market, checkout my Price action trading course.

Time-frame selection for qqq day trading systems

PowerShares QQQ day trading systems are quite popular in the daytrading community. Intraday trading of QQQ index ETF fund offers nice opportunities for short-term traders. Even daytrading QQQ options is used by plenty of day traders that want to participate in NASDAQ 100 index movements.

There are also strategies using NASDAQ index fund ETFs like PowerShares QQQ during pre-market trading hours or as after hours stock daytrading.

The range of the QQQ index ETF daytrading systems is rather wide. Systems that trade the QQQ could use some momentum models, news intra-day strategies and also technical trading based on real time streaming stock charts that analyze price action or use some technical intra-day trading indicators for the decisions.

The selection of individual strategy for QQQ day trading is then based on time-frame that is used for realization of short-term trades with QQQ index fund.

1-minute qqq index intra-day strategies

Short term QQQ index trading strategies based on this very short time-frame for single candlestick are often scalping strategies. Daytraders use an actual price action and bid/ask evaluation of current supply demand for their decision. The level 2 stock quotes are used in this trading style. No additional technical analysis indicator is used. The trading period is typically one or two hours after the stock market open when the volatility of the market is highest.

The chart below shows development of price during the first two hours:

This type of daytrading strategy requires high level of attention and sometimes is the preferred strategy for automated stock trading systems.

5-to-15 minute time frame for day trading qqq nasdaq index fund

This is a typical time-frame period for discretionary day traders that use price action for their decisions. The usage of additional daytrading indicators rise for traders using 10 or 15 minutes time-frame period for QQQ day trading.

The trading period for daytraders using a 5 to 15 minutes time-frame is typically the first two hours after the stock market opens and the last two hours before the stock market closes. The two charts below show different periods during a trading day for these time-frames.

60-minute time frame for daytrading powershares qqq

This time frame provides a broad situation overview. The daytrading systems that use this type of strategy often expect that the trade can last more than one single day. So the short-term traders trading PowerShares QQQ using this time-frame should expect to hold overnight risk of price movement.

Day trading strategies using 60-minute streaming stock charts are based on price action, chart patterns or on using some daytrading indicators. Many daytraders love to use short-term moving averages for their decision.

Two tips for day trading systems that trade the qqq etf

Here I would like to note two tips that will improve your QQQ day trading strategy. Choose your basic time frame for your PowerShares QQQnday trading system. But you also have to use a larger time frame to check the broad situation with the NASDAQ 100 index and its ETF QQQ. You have to analyze the broader NASDAQ 100 index fund situation to know the preferred trading direction for traders and investors that use larger time frames.

The second tip is to use some form of leader concept. There are times during a year when daytrading QQQ index ETF shares is influenced by some leading stocks or sector. There were Internet stocks during the NASDAQ bubble that acted as leading indicators for intraday traders. It was AAPL stock that affected movements of PowerShares QQQ in the 2020 – 2020 period.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    The Best Binary Options Broker 2020!
    Perfect For Beginners!
    Free Trading Education, Free Demo Account!
    Get Your Sing-Up Bonus Now!

  • Binomo
    Binomo

    Good Broker. Only For Experienced Traders!

Like this post? Please share to your friends:
Binary Options Guide For Beginners
Leave a Reply

;-) :| :x :twisted: :smile: :shock: :sad: :roll: :razz: :oops: :o :mrgreen: :lol: :idea: :grin: :evil: :cry: :cool: :arrow: :???: :?: :!: