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WB 1778 Multiple Timeframe Analysis
WB 1778 Multiple Timeframe Analysis
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Timeframes
Traders often look at market data as bars or candles.
The “timeframe” of a chart is the length of one of
those bars.
– E.g., 5 minute, daily, monthly
Other (non-time-based) divisions are possible, but
simplicity is good.
– Activity measures such as trades (ticks)
– Volume traded
– Range (be careful with this one)
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The Three Timeframe Plan
Trading Timeframe
– Main focus timeframe
– It does not change
Higher Timeframe (HTF)
– Usually used for context
Market structure
S&R levels
Lower Timeframe (LTF)
– Precisely time entries
– Monitor patterns as they unfold
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Timeframe Scaling
Timeframes usually are related to each other by a
factor of 3 to 5.
– There is nothing magical about this, but it’s just common
sense.
– Less than 3 adds little new information.
– More than 5 usually omits information.
Timeframes scale by the relationship of the square
root of the ratio of the timeframes’ periods.
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Scaling Between Timeframes
Scaling factor = sqrt( lengthtf1 / lengthtf2)
Also applies to volatility measures such as range,
target size, stop size, etc.
Example: You are trading a system with 1.5 point
stops on a 5 minute chart and want to scale it to
hourly charts.
– Scaling factor = sqrt (60 / 5) = 3.464
– New stops = 5.2
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Multiple Timeframe Analysis
Using more than one timeframe to analyze market
patterns.
Can be done explicitly, on multiple charts of different
timeframes…
Or implicitly, looking at structures from multiple
timeframes on a single chart.
(Most of the literature focuses on and assumes
multiple charts.)
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Why Use Multiple Timeframes?
Patterns can become more powerful and more
reliable when placed in multiple timeframe context.
Standard technical patterns appear in random data,
so how do we separate those “random” patterns
from those driven by real supply/demand
imbalance?
Learning can be a problem because it is difficult to
understand multiple timeframes without a firm grasp
of one.
– But patterns can become more powerful when placed in
multiple timeframe context.
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Some Common Misconceptions
Our statistical work and quantitative analysis suggests that many
commonly held beliefs regarding multiple timeframes are untrue:
Higher timeframe patterns are more important.
– False. Timeframes “pass control” and any timeframe can be the dominant
timeframe at any time.
Only trade when the higher timeframe is trending.
– False. Many of the best lower timeframe trends come in higher timeframe
consolidation.
– False. Many of the best lower timeframe trades come at higher timeframe
turns.
Only trade with the higher timeframe trend.
– Questionable. Trend indicators suffer from lag and put you on the wrong
side of the market, statistically speaking.
– Trades with the HTF trend do tend to work better, but trends do end, so
it’s necessary to read trend structure.
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Trend Indicator Statistics
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Concepts in MTF Analysis
Understand the best (most reliable) patterns on a
single timeframe. e.g.:
– Mean reversion from climax areas
– Failure tests at the extreme of a range
– Interface between pullbacks and new trend leg
– Drives to target areas (from pullbacks or breakouts)
Then work to understand how timeframes interact
and influence each other.
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Possible Applications of MTF
As actual trade entries with specific multiple
timeframe conditions
As a filter to skip trade entries
Use awareness of HTF structures and levels for profit
targets.
Use LTF to monitor HTF patterns. Usually, failed
moves on the HTF will fail via failure of LTF
continuation patterns.
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Using LTF Continuation
Patterns to Monitor HTF Trends
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Review of Pullbacks
Standard continuation pattern
Typical pullback failure patterns:
– Failure at previous swing
– Failure by strong momentum against
– Failure by sideways action
– Failure that turns into a complex pullback.
Failure of failure
The stronger and more over-extended the move, the
larger the pullback typically is.
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Early Trend
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Working off LTF Overextension
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form or by any means without the express written consent of Waverly Advisors.
HTF Trend in Progress…
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LTF Continuation Patterns
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HTF Pauses…
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LTF Patterns Support HTF Consolidation
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HTF Complex Pullback
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…Is a Violent LTF Downtrend
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HTF Trend Leg Ends with Climax
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LTF Resolutions Clarify
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HTF Trend Resumes
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…Via Clear LTF Trend Reversal
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More Serious HTF Climax
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…Reads as a Major LTF Reversal
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Sometimes Candles Help
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Using HTF as a Filter
Key concept: be careful of LTF trades against strong
HTF tendencies.
Why? Because it puts you on the wrong side of the
market, statistically speaking.
Best HTF tendencies in this case might be:
– Pullbacks in strong trends
– Failure tests
– Climax patterns
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Do You Like This Failure Test
Buy in Gold?
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Does Context Matter?
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form or by any means without the express written consent of Waverly Advisors.
Yes
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Short This Extended Pullback?
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form or by any means without the express written consent of Waverly Advisors.
Difficult in HTF Climax
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Not an Easy Trade
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Timing Entries from LTF
Many ways to do this, but here is one good example:
– Look for HTF pullback (or flag)
– Enter LTF failure tests in the direction of the flag’s
anticipated breakout.
– Manage at least part of the trade from the LTF (with
respect to profit targets.)
– Use LTF stops.
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Assume We Want to Buy this Pullback
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These Entries are Early
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Bought Here: Very Early
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No Entries Here…
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Another Possible Entry
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Still Early
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Toward an Intraday System
Use 15-60 as TTF (Trading timeframe)
Use a divisor of 3 to 5 to find LTF
– E.g., 5/1, 15/5, 15/3, 60/15
Look for good TTF pullbacks
– Need to understand how to trade pullbacks!
Trigger entry from LTF failure test
– Need to understand how to trade failure tests.
– May need some flexibility in defining the pattern.
Use LTF risk, and manage at least part of the trade on the
LTF.
Be prepared to hand winning trades off to TTF.
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Intraday MTF on T-Note Futures
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There is Not Always a LTF Entry
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Extended Trend: Complex Consolidation
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Good LTF Failure Test Entry
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form or by any means without the express written consent of Waverly Advisors.
First Pullback After Trend Change
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Very Small Failure Test:
Difficult Entry
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Pullback in an Established Trend
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Clean LTF Failure Test Entry
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Caution
Beware the “Timeframe Justification System”
Be clear about what your focus timeframe is and
always trade that timeframe.
If you bump a losing trade up to a higher timeframe
to find a reason for holding it, you may be in trouble.
– (You might legitimately bump a winner up.)
If you find yourself looking at a timeframe you never
look at while you’re in a trade, you may have a
problem.
Always trade your focus timeframe.
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Summary of MTF Analysis
There are not always MTF considerations.
When HTF is trending, patterns that work with that trend
will resolve more easily.
Then HTF is trending, patterns against that trend tend to
fail.
When HTF is ranging, expect sharp, violent LTF trends.
Breakouts can be much more significant if supported by
HTF structure.
Ranges on LTF are usually HTF continuation patterns. It is
possible to monitor HTF trend integrity via these
patterns.
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form or by any means without the express written consent of Waverly Advisors.
Waverly Advisors, LLC:
Research Products
Tactical Playbook – Available on Interactive Brokers - IBIS
– In-depth Monday report
Technical setups for all major asset classes
Exact trade recommendations
Macro perspective on major events and risk factors
– Daily update
Updates to positions, stops, and trade management decisions
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Adam Grimes
CIO, Quantitative Analysis, Risk Management
[email protected]
Andrew Barber
CEO, Macroeconomic Analysis
[email protected]
Waverly Advisors
228 Cedar Street Damon Krytzer, CFA
Corning, NY 14830 Managing Director, Portfolio Construction &
Management
(607) 684-5300 [email protected]
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