Multi time frame trading

Like many others I always try to increase the probability of each and every trade becoming profitable. One such way is to use multiple time frames when you are considering entering into a position. Next I will share with you they way I use this method for intraday trading, although I will usually stay in the market for no more then 6-12 hours I am still using charts from a completely different scale to support my decision.

For my trading I am using 3 different time frame before making any decision.
1.Daily chart over 24 months
2.Hourly chart over 3 months
3.15 minutes chart over 7 days

The daily chart will be used in order to understand the underline trend of the market overall. I will use the USD/CHF pair as an example. According to my analysis we are currently in a downturn towards the lower boundary in a bullish run. This implies two potential and opposite trades.
1. Long - assuming that I am correct about the trend there is a high probability that price will rebound once it touches the lower bound of the trading channel.
2.Short - The argument is the same but, why wait ? We can go short now and exit when the price hits the lower bound.





The hourly chart tells a different story. From the beginning of January 2010 to the 19th of February the market was in a bullish trend , a 45 degree positive incline. From February you can see the trend has run out of steam. The rising bottoms are gone replaced by falling tops are everywhere, this suggest that the bullish run is over and we are now in the midst of a bear move. See the chart below:



This is enough information for me to make a decision which way 2 go. I will take the downside, short on the US Dollar, My target would be the bottom of the channel on the daily trend and my stop loss will be placed around what I see as the closest resistance point (1.0737).

In order to fully optimize the potential of the trade I will drill down to the 15 minutes chart. This chart will not affect in anyway the decision if to go long or short, it will only determine where the optimal entry point is.

For this I will be referring to the Elliot wave principle. Assuming the main movement is down one can assume we are now in wave 4 of the movement; all we need now is a beginning of a downturn indicating for wave #5 to commence in order to get into the position. See chart below.





To summarize, we use the daily chart to understand overall market direction and the type of the trend (direction, uniformity, stage). The hourly chart will be used to determine the direction of the trade and the 15 min chart to locate the optimal entry point.

I will be reviewing this trading idea in 5-10 days and see if the market behaviour was similar in anyway to my expectations.

Good luck and happy trading.

Shai Heffetz

Disclaimer
The comment in this blog is the personal opinion of the contributors and not InterTrader.com. The content does not constitute financial, investment or tax advice. You are advised to discuss your specific requirements with an independent financial adviser prior to entering into any bet. InterTrader.com is not responsible and disclaims any and all liability for the content of comments written by contributors to the blog, and the content of any third party sites linked from this blog.

Building your own trading system

Many traders find themselves very successful on paper but when it comes to real life somehow profitability eludes many of us. Why is that ? how we can come around and change it. I would like to offer a couple of principles and methods that changed they way I am trading and more important the bottom line.

First of all you need to start with some kind of a concept. This is an idea usually originated from your own commonsense and understanding of the markets you are trading.

This could come from looking at a chart or an indicator and finding a reoccurring patterns.

At this point you should increase the time scale of your little idea and see if the concept is applicable further into the past ,the next stage would be to see if this rule applies to more then just one market. Working with a system that appears to be profitable using back testing on multiple and un correlated markets decreases your risk significantly, since all technical analysis signals are probability based the greater the sample the higher your confidence.

Now you need to set some objective rules to it. These should be rules that would be set in stone and should include:
1. Entry Criteria.
2. Target for success (Limit)
3. Target for signal failure.

Here is an example I will take the EUR/USD pair as an example. The rules for my system will be simple

* Time Frame : Daily chart
* Indicator : 87 exponential moving average
* Entry Criteria 1 long : If the moving average is trend for more then 5 days in the * same direction and price is above the EMA(87].
* Exit criteria limit : If the EMA (870 has turned down for over 3 days and price *
crossed under the EMA (87) level exit.
* Exit criteria stop : If I lost more then 200 pips exit.

The short version will be just a mirror of the long one.

In the chart below you can see a rough sketch for potential entry and exit points.




I am not claiming for this specific system to be good or profitable, although it does look like it. More important the rules are all set in advance and they are quantitative , there is almost no room for judgment calls.

The next stage I would advise on is back testing with a tool like esignal ,they offer an easy to use wizard where you can generate a code that will apply the rules. Once complete run a back test on the markets you intend to trade looking 12-24 months into the past.

At this point take the data you got on your trades analyze trying to find out how you can improve the system, fine tuning. Even good systems will show a loss first time around only once you tweak them you may find way to refine your system. Once you are satisfied. It's time to move to get cracking.

Money management - At this point you need to decide how much money you are willing to risk using this system, Once you decided it's time to set up the risk parameters. risk is a combination between your stake size and the stop loss , it is recommended that in each trade you will not risk more the 1% to 1.5% of your trading capital. In proactive then . If I am trading the EUR/USD pair using the above system with a £5 per point stake and a 200 pips stop loss , my risk per trade is £1,000 therefore my initial balance should be £66,000- £100,000.

Now that you have your system comes the part where most of us fail, easy to say but very hard to follow. Do what your system tells you to do and mostly ignore any decision you are looking to make on the fly. The reason for that would be that while trading your decision making process is tampered by wither fear of loosing or greed of trying to squeeze an extra profit. you must fight these urges and listen to the system that you created and tested.
There are some exception to that ,sometimes their might be some fundamental changes in the market which would have a significant impact on the market and should be take into consideration before entering or exiting a trade as well as while managing a live one.
A trading system even one that exhibited magnificent results in back testing is not a guarantee for future profits, but I can tell you that it does increase the probability and likelihood of becoming a more profitable trader then one with no plan at all.

Good luck and happy trading

Shai Heffetz

Disclaimer
The comment in this blog is the personal opinion of the contributors and not InterTrader.com. The content does not constitute financial, investment or tax advice. You are advised to discuss your specific requirements with an independent financial adviser prior to entering into any bet. InterTrader.com is not responsible and disclaims any and all liability for the content of comments written by contributors to the blog, and the content of any third party sites linked from this blog.

Market direction a Macro view - Dow industrials average

I would like to offer a view on the direct of the stock market. I will be using the Dow industrials average (^DJI) for this as most indices follow it's lead. I tried to use the Elliot wave theory and apply it to the beginning of the 2008 crisis. In my view this was the beginning of a new primary cycle (bearish).

According to my analysis this primary cycle has now ended and we have just begun a new primary cycle which in my view is bullish.

I would advise from this point on for you to have the chart attached in front of view as I intend to reference it frequently

Wave 1

Started on the 15th of May 2008 and completed on the 10th of July same year. The drop was 16%. At this point most still were under the impression this is just a minor correction

Wave 2

This corrective wave tells the real story, it lasts about almost 2 months until October with a perfect 23.60% Fibonacci retracement. It end abruptly is Lehman brothers go under.
Wave 3 - This was the largest wave with a 34% decline from the top of the wave 2 , with a perfect internal ABC structure, it lasts 2 long months
Wave 4

This corrective wave gives hope that the worse may be behind us but, again a perfect Fibonacci retracement to the 38.2% line from the top of the wave and 23.60% from the beginning of the cycle ,just like the books says it should be.
Wave 5

This wave appears as soon as everyone are back from the Christmas break and there seems to be no stopping .If you may remember back then many thought the financial world is imploding and many started to claim capitalism is gone.

A nice anecdote is too look into the what some of the investment and trading legends of our time , Mr George Soros and Mr Warren buffet where doing , If you don't know then I will tell you. They were buying anything they could get their hands on . In the words of the legendary investor Benjamin Graham " When other are greedy be fear full when they are fear full be greedy.

March of 2009 marked the beginning of the corrective wave for the primary movement. A was from March to June , 2 was from June to July and C from July until....

This is the tricky part. Some may say that we are still in the midst of wave C but, Allow me to offer an alternative solution. In late August 2009 the index hit it's 50% Fibonacci retracement line from the beginning the cycle. Even more you can observe that the angle of the rise changed. From a 71% angle to a 26% angle.

This hypothesis is also supported by the flow of fundamental information typical to a bullish wave 1. Does this sound familiar in any way.

- Fundamental data is still negative
- put options are in vogue
- implied volatility in the options market is high

So , where are we today then ? My view is that we are now in the middle of 2 for in the new primary cycle, therefore as long as 10,146 holds as support this should be confirmation of the trend. My target price before reevaluation would be around 11,000 . In many ways it’s not the number on it’s that tells the story but they the market reached the target level which may reveal what will be the next step. 


Good luck and happy trading

Shai Heffetz

Disclaimer
The comment in this blog is the personal opinion of the contributors and not InterTrader.com. The content does not constitute financial, investment or tax advice. You are advised to discuss your specific requirements with an independent financial adviser prior to entering into any bet. InterTrader.com is not responsible and disclaims any and all liability for the content of comments written by contributors to the blog, and the content of any third party sites linked from this blog.