Profit in Short Term Trading : Look Far!

Short Term or intraday trading continues to be big lure traders and people. All kinds of setups are investigated, strategies drawn and yet at the end, there is sometimes a loss that is hard to comprehend as price levels are easily destroyed. And weak rallies turn into waves of short covering as more and more people join the cannon fodder trail! At times, these failures may be due to ignoring a simple technique called MTF, which is a 30 second routine deployed to improve trading results drastically!

Trading “Breakouts”

A favourite method of many new traders is the breakout where all kinds of tools are deployed to move in the direction of a “breakout” and profit from quick moves. While very profitable if done right, in the wrong setups this strategy can be an easy way to lose money. The typical approach the new trader takes is to open up their 5 or 15-minute charts, identify a support/resistance level and then look to jump on price as it breaks through these levels. Many a time, however, the trade is left frustrated when the move, after looking profitable initially, simply reverses sharply and takes them out.

Why is this? Well, there are a host of reasons that drive price action, but the simplest one in most scenarios is that price simply ran into a “higher time frame” level and bounced.

This becomes especially critical during trending markets – like what we are experiencing now in India.

Consulting a Higher Timeframe chart can at times alert traders about key price levels which may not be visible on short term timeframes.

Missing Wood for Trees

Illustration: AXIS Bank March 2019

The 5 Minute chart shows Axis Bank in a tight range of Rs 10 or so – thus an adventurous trader may be prone to shorting at the lows and going long at the highs in quick succession. This may even work for a while if trades are quick – and the idea is to make only a little money each time. Hiding behind this range is however the true face of the near term chart – as visible in the weekly charts!

The same stock, Axis Bank now shows that the congestion being witnessed is a time correction  along a strong uptrend! and the trader is lucky getting away as the price is consolidating after a strong upmove over the past few weeks!

The monthly chart shows a monsterous move! The price formation seems to be suggestive of a move outside the Bollinger Band – a possible sharp breakout of breakdown! If the trader got away for a while playing  football at the edge of a cliff, its just that the ball didnt go too far!

Imagine- its the same stock but three very different interpretations – an oscillating stock with boring predictability, an uptrending stock caught in a time correction  and an explosive move awaited!

MULTITIME FRAME TRADING (MTF)

MTF is the technique of analyzing several time frames of the same asset before entering a trade. This type of analysis is best done using a top-down approach, i.e. starting at a higher time frame and working one’s way down, via several lower time frames, until the execution time frame is reached where a trade could be entered.

Traders who use this technique usually look at 3 or 4 different time frames to identify the general trend and find the best entries. They minimize their risk and improve the odds of success simply by taking the bigger picture into account. It can easily be combined with any trading strategy.

Benefits of MTF

  1. The longer timeframe gives one a better and bigger picture of what is happening. It is like a birds eye view, that can see wide and far.
  2. The monthly timeframe can hide trading setups that form in the weekly, daily, and anything below the daily timeframe.
  3. Similarly, the weekly timeframe can hide good trading setups that are forming in the daily, 4 hr and the 1 hour timeframes.

The shorter trading time frame is used to decide on entries and exits while a higher time frame is used to decide on the direction of one’s trading and removing trades that conflict with the underlying setup.

Lets say one is trading using a 60 minute chart for swing trading- in this scenario, if the weekly chart is in a sustained up move, then the bullish trades are likely to be more rewarding than the bearish trades. Trading at critical junctures or noting down key price levels can become very handy and only a genuine breakout should be taken in the shorter term.

In case there is a conflicting signal, one may leave the trade completely till supportive conditions emerge.

To increase your odds and to identify trades that lead to smoother development, only trade into the direction of the higher timeframe.

Multiple timeframe analysis should be at the core of every trading strategy. Before you start your trading day, move up one or two timeframes and see where you are in the overall picture. Only when the “stars “ are aligned should you initiate a trade.

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