Secret of Time Frames in Trading Systems
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Trading Systems are built on top of technical analysis, which comprises of charts, indicators, oscillators, price patterns and etc. Just like the music, technical analysis is a universal language. Traders can apply technical analysis to any instrument in any market such as the Google stock in NASDAQ or the Japanese yen in Foreign Exchange (forex).
A typical chart consists of many bars; each bar represents prices which are open, high, low close of any specific period. A bar in weekly chart represents prices in a specific week while a bar in daily chart represents prices in a specific day.
Most traders analyze charts in only one period, usually daily. This is not enough; markets are too complex to be analyzed in only one period. Every time frame relates to its next higher and lower time frames.
The secret of time frame in trading system is to use at least two but not more than three to make a decision of any trade. This system is called “Triple Screen Trading System” introduced by Dr. Alexander Elder in his book “Trading For A Living”.
For day-traders, they might choose the hourly chart as their favorite trading period. Then go immediately up to the daily chart as the higher order time frame to analyze the trend before making a decision to long or short. Traders might use any trend following indicator to identify a trend in the higher order time frame. Once the trend is identified, return to the favorite hourly chart to find where to enter, exit, take profit and stop loss. Traders might also go down to analyze the chart in lower time frame to find trailing stop.
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Source by Hideyoshi Taro