In this showcase page, we'll take a look at an important trading idea, plus some of Wave59's newest features. Multiple time frame analysis is an important concept, and one that is ignored by many traders. Markets are fractal in nature, meaning that the same patterns show up no matter what time frame you are looking at. A 9-5 Count will signal small turns on a 1 minute chart, bigger turns on a 5 minute chart, and even larger turns on an hourly chart. The signals are always the same, but the point value of the resulting swing will vary based on how close you "zoom in" to the market.

The idea behind using multiple time frames is to check the longer time frame to get an idea about the context of signals setting up on a smaller time frame. So if we have a 9-5 signal telling us to sell on a 5 minute chart, what we'll do is take a look at the hourly chart to see how that signal fits into the bigger picture. If the hourly is topping out and giving us sell signals, we know that this represents a potentially good shorting opportunity. However, if the hourly is right in the middle of a big uptrend, with no signs of topping action, it means that our 5min signal is probably just a corrective top, and we need to be very careful if we decide to short it.

This kind of analysis was available from the beginning in Wave59, but only on intraday charts. With the new version just released, we can now apply it to longer time frames by looking at weekly and monthly charts. Let's take a look at a recent example from the ES market:

This is a continuous monthly chart of the ES, showing the last few years of price action in this market. Each bar represents an entire month of trading activity, so it's a very long term view. The red arrow on the chart shows a situation where we had a gold 5, signaling to us that there is a potential top forming here. You'll also note that bearish momentum divergence was setting up. This tells us that, at least over the next few months (if not longer), we ought to be looking for topping action in this market. This is the context of the market, which we need to keep in mind as we move down to faster time frames that will play this situation out.

Here's the weekly chart:

In this chart, each bar represents one week of price action, so it's a bit faster than our last chart, but still takes a long term view. You can see that in September of 2005, it is topping as well. There is a red 9, a red Exhaustion Bar dot, and bearish momentum divergence. All three of these technical indicators are telling us the the weekly chart is topping, and to look for lower prices. Remember that this is happening at the same time the monthly chart had built up that gold 5 sell signal.

Now let's move to the daily:

This chart is the standard daily chart that we're familiar with, and shows the situation in September. At the location of the red arrow, we have a red Exhaustion bar, and bearish momentum divergence. We are also about to bounce off the green trendline connecting the last three tops, as well as the median line of the Andrew's Pitchfork tools. If this was the only chart we were able to look at, we'd see the potential for a short, but it wouldn't have necessarily hit us in the face. There's a confluence of signals here, but it's not overwhelming as in some of the cases in previous showcases. I'm using just a handful of tools on purpose in this example to show how we can trade using context as well. We need to think about the market on multiple time frames, and use all three of them to tell us what is happening and what our trading strategy ought to be.

Remember that the monthly has just issued a topping signal, as has the weekly. Our longer term charts tell us that the market should be working on forming a top in this broad time frame, so any bearish signals on the daily chart have extra power, while bullish signals have reduced power. It is especially true when the signals line up on top of each other. In this particular example, it was a clear opportunity to go short, and the market fell around 75 points after the Exhaustion Bar came in.

For those of you familiar with these showcase pages, you know that I repeat over and over about using multiple tools to confirm a trade. That is good advice, and this showcase demonstrates how you can do that across time frames as well as just on a single chart. Remember that the biggest moves will also show up on the weekly and monthly charts, so if you are really going to load up on a particular trade, you definitely need to take a look at those time periods and see how they correlate with your ideas about what direction the market should take. Don't fight the larger time frame - use it to get you positioned in the correct direction.

The idea of using multiple time frame analysis is a basic one, but a concept that is often overlooked - especially by beginner traders. Try these tools on longer term charts of your favorite markets, and see how adding the concept of context to your analysis will oftentimes clear up a lot of questionable and confusing trades on your daily charts.

All for now. Happy Trading!


Back to Archives

Copyright © 2000-2009 by Wave59 Technologies Int'l, Inc. All rights reserved.
This document may not be copied in part or full without express written permission from the publisher.